OnPath Credit Union

Does your eyes glaze over when you hear news about the stock market? Despite the recent economic turmoil, the stock market remains among the most important options for Americans to build their wealth and secure a comfortable retirement. So, while we recommend you work with a financial advisor to guide your investment strategy, here are some stock market basics every investor should know.

What is the stock market?

Simply put, the stock market is where ownership in companies is bought and sold – this is also called trading. When you buy stock – also known as shares — in a company, you’re buying a piece of that company, and that makes you a shareholder. When you hear talk about “equities,” remember that’s just another word for stocks. The “stock market” is, however, a general term. Companies actually list their stock on one of several different stock exchanges, such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the National Association of Securities Dealers Quotation System, which is commonly referred to as the NASDAQ.

How do you make money in the stock market?

There are two basic ways to make money in the stock market.

1. Buy a stock, and then sell it after it increases in value. The profit you make is referred to as a capital gain.
2. Buy a stock that pays dividends to shareholders. Dividends are a company’s earnings, which it pays out to its owners, or shareholders. Companies that pay dividends are often older or well-established firms because they’re reinvesting their earnings back into the company.

What’s the difference between a stock and bond?

Stocks are ownership investments – you’re buying a piece of a company. Bonds, on the other hand, are a lending investment. You give the bond issuer money, and they pay you interest in return, just like you pay interest to a creditor. In general, bonds are considered safer than stocks since the bond issuer has a legal obligation to pay them. They are not, however, risk-free.

What is an index?

An index is a measuring device for investments in the stock market. Stock market indexes are used by investors to decide which markets they want to invest in and how much of their money to put into each one. An index fund is used to put the plan in place.

What are first steps to getting started?

1. Determine your asset class mix.
2. Decide how much you want to allocate between high-risk and lower-risk investments.
3. Establish whether you will be an active or passive investor. Passive investing is more popular among investors, but there are arguments to be made for both styles.
   1. Active investing: A hands-on approach to investing that requires confidence in knowing exactly the right time to buy or sell.
   2. Passive investing: Investing for the long haul and requires a buy-and-hold mentality. Passive investors limit the amount of buying and selling within their portfolios which makes it a very cost-effective way to invest.

Whether you choose to pick stocks yourself or pay a professional to do it, there will be fees involved. So, do some homework before committing.

Set it and forget it. You may panic every time an investment moves, but don’t touch it. Investing in the market is known to be a long-term plan as opposed to a get rich quick scheme.

What is diversification and why is it important?

Diversification simply refers to the practice of spreading your money among a variety of investments to balance risk. It’s important because nobody can know for sure exactly how different types of investments will perform at any given time. A diversified investment portfolio has lower risk because if one type of investment is down, it can be balanced by others that may be doing better.

What is a mutual fund?

A mutual fund is a collection of stocks or bonds, in which investors pool their money. Mutual funds can be a great way for smaller investors, and those who don’t have the time or expertise to research and purchase individual stocks and bonds, to diversify their investments. Shares in a mutual fund are purchased in the same way that individual stocks are purchased.

Research before you buy.

Even if you trust your broker or advisor completely, it is important to do your own research before you purchase any security. After all, it is your money on the line – win or lose, the person or company who sells you the investment product earns a commission. Remember too, to have realistic expectations. Don’t take “hot” stock tips that promise a huge payout, particularly if you hear about it through an anonymous email.

The best place to begin your research is the internet. Visit the company’s website and read all about it – including a history of its stock price, financial position, breaking news about products or services, and management. Whether you are buying stocks or bonds, it is important to know what you are getting into.