The stock market has been around in one form or another for hundreds of years. Every day, billions of shares are bought and sold in various stock exchanges. Trades happen all around the world while some are sleeping, and others are going about their regular jobs and routines. If you are thinking about buying shares, it’s worth getting your facts straight first. Important questions covered in this article include what the stock market is, the difference between investing and saving, understanding the risks, and much more.
What Is the Stock Market?
Publicly listed companies are effectively owned by a large collection of shareholders. A share or stock of such a company is a small fraction of the company. Just about anyone can buy and sell stocks of their favorite public companies, be it Apple, Tesla, or Amazon. When these companies do well, the shareholders get a return on their investment either as a dividend or an increase in share value. On the other hand, companies benefit from being listed on the stock exchange because they are able to raise additional capital.
The stock market, or stock exchange, is where shares are traded. The relevant governing bodies regulate all activities that occur there. In the United States, this body is the Securities and Exchanges Commission (SEC). There are various stock exchanges around the world, including the New York Stock Exchange (NYSE), which is the largest, followed by the NASDAQ Stock Exchange. The largest in Europe is the London Stock Exchange.
The stock market is open all year round. There are, however, trading hours and stock market holidays. The NYSE opens on weekdays between 9:30 am and 4:00 pm ET. These hours are important to note because people trade on this stock exchange from all over the world in their respective time zones. So while you might be done making trades by late afternoon, someone in another continent could be completing their trades in the middle of the night.
Stock market holidays for the NYSE include public holidays, such as beginning and end of year holidays like New Year’s Day and Christmas. The market is also closed on President’s Day, Martin Luther King, Jr. Day, Independence Day, Memorial Day, Thanksgiving, Labor Day, and the religious day of Good Friday. Partial holidays are observed on Black Friday and Christmas Eve, and on these, the NYSE closes at 1:00 pm ET.
Investing Versus Saving
You may have read a lot of news headlines about the shares of companies you regularly buy products from. If you are a shareholder in such a company, the news could be exciting or worrying, depending on whether you stand to lose or gain. Investing in stocks can sound thrilling, but to get the most from it, it’s important to understand the basics of what it is and isn’t.
Let’s start with the difference between saving and investment. Whatever stage of life you are in, thinking about your financial future is important. You have to answer some important questions regarding whether you have enough of an emergency fund, if you are adequately insured, and how you can plan better for your retirement. Even if you are still new in the working world, it’s never too early to learn how to budget, save, and build wealth.
Saving is putting away a portion of your income, typically into a savings account. There are various types of savings account, but in general, the interest rates are not particularly high. In 2019, the average bank interest rate on a savings account in the United States was 0.09% per annum. This was slightly higher than the checking account average of 0.06%. In essence, a savings account is just a safe place to store your money and keep its value. If you stash away your cash under your mattress or in a safe, you run the risk of having that money stolen or destroyed. Additionally, by the end of the year, your money is going to be worth a little less than it was today because of inflation. The interest rate in a savings account, although small, is enough to maintain the value of your money over time.
The great thing about putting money in a savings account is that it is safe and relevantly out of sight. With automatic monthly withdrawals from your checking to your savings account, you can make saving a habit. You may be able to find a savings account with a little more interest than the average account, but in general, you aren’t going to get rich by just saving. Saving accounts are the safe choice because your interest rate is guaranteed, and the principal amount you put in is insured. If you are looking for more interest and reward, however, you have to be willing to risk more. For higher yields, consider investing.
Investing is a great way to build wealth. When you put money into an investment account or another kind of investment vehicle, you expect a return of some sort. There are different ways to invest, and some ways have more risk attached to them than others. Examples include the stock market, the forex market, property investments, cryptocurrencies, and money-lending investments.
For 2019, the average money market interest rate in the United States was 0.16% annually. What this means is that you could have earned an extra 0.07% interest on your money had you invested it rather than saved it. It must be emphasized, however, that these figures are based on averages. Not everyone who invested made that much return or any at all – some even lost money. Ultimately, your investment returns are determined by several factors, including market analysis, experience, investment diversification, and market conditions. We go into the basics of making wise investments a little later in the article.
One clear thing is that you can grow your money much better and faster when you invest some of it rather than save all of it. Investment has more potential for higher yields. There are risks involved, and we are going to discuss these, but we hope you see now that investment can be a good vehicle to build wealth over time. Yearly statistics show that average investment returns continue to beat the average savings account interest rates.
Understanding the Risks and Benefits
Before you take your hard-earned money into the stock market, it’s important to understand the risks and benefits. There are different types of investments. The highest earning potential comes when you take higher risks. With that, however, there is also a chance that you could lose most of your money.
When investing in stocks, you are investing in particular companies. There is always the chance that the company could get into financial trouble, get hot by a lawsuit, or in the worst-case scenario, be forced out of business completely. To reduce your risk here, there are a few things you can do. Firstly, invest in companies with a good track record and a strong financial position. Research the business, watch the news, hear what experts have to say, and don’t invest all your disposable income. Another tried and tested tip in investing is to diversify your investment portfolio. You reduce your risk when you don’t buy shares in a single company. Instead, look at a range of companies that you are interested in, and buy shares in each of the ones meeting your criteria.
Unlike saving, when you buy shares, your initial or principal investment is not guaranteed. The value of the shares you own is equal to the value on that day and not the value you bought them for. If you are investing for the long-term, the daily market fluctuations should not influence you to sell as soon as you see a dip or a rise, for that matter. What affects a day-trader’s decision about buying and selling stock shouldn’t affect you as much. Short-term traders watch the market very closely each day to take advantage of these small ups and downs. They trade huge volumes of stock almost daily and are thus able to capitalize on even the smallest changes in share value.
Being aware of the risks of trading shares helps you to have reasonable expectations. Your results are not going to be the same as the next person unless you have invested the same amounts in the same companies. There is a need for caution and due diligence when investing, but sometimes people can get lucky. One of the companies you own shares in could strike a huge deal or gain inroads in a previously untapped market. This could result in a surge in the share price for that company. Sometimes you could have seen it coming from the media, but many times such situations are just an unanticipated bit of good news. Having reasonable expectations can help you proceed with caution and avoid making impulsive decisions about where you put your money.
The Best Way to Start
If you’re ready to start buying shares, you need knowledge, capital, investment goals, and a broker. A great way to start is by using a demo investment account. This allows you to play around with buying and selling shares before you use your own money.
You also need to think about your long-term strategy and how much you can set aside towards growing your portfolios. Most early-stage investors deposit monthly to build up their shares because they understand that investing is a long-term play, and they are not going to become rich overnight.
There is a lot of information available about buying shares. Do your research and gain your own understanding, but also make use of experts around you and on the internet. Many people have been investing for years, and when you tap into their wealth of experience, you can avoid making many of the beginner mistakes they made. Much of the information you need is for free, but it doesn’t hurt to invest in more intense training if you need more assistance and understanding.
When you have watched all the videos you can, read as many investing articles as you can handle, and played around with your demo account, don’t be too afraid to get started. There are many brokers you can use, and it’s never been easier to use an online broker for low charges or even for free. Always start small, and don’t be put off if you don’t experience the buzz and excitement that you hear from others around buying and selling shares. It takes patience to see returns.