Unlocking an understanding of how the stock market works can generate immense wealth for those who are disciplined and patient but getting started can feel overwhelming. Add in the horror stories of people who have lost their retirements or worse on a bad market pick and you might be afraid to even get started.

But if you can master a basic understanding of how the market can be utilized as a tool for wealth building, the potential for success is nearly limitless. So let’s conquer your fears and learn how the stock market runs and what you’ll need available for your first investment.

What is a Stock?

First, let’s cover the basic definitions of terms you’ll encounter often when investing in a stock portfolio.

A stock, also know as a “share”, is an agreement between a company and a buyer that the buyer owns a percentage of the company. Depending on how much the buyer pays and how many stocks they own, this percentage can be a 1/1000th of a percent who doesn’t have much say in how the business runs, or they can be the majority shareholder who sits on the Board of Directors and has immense sway in the business operations.

Why would a company want to give away portions of control to someone who doesn’t work there? In exchange for the equity a shareholder receives, the company then has access to those funds that were used to buy the stock, commonly referred to as “capital.” When a company wants to acquire competitors, launch new products, or participate in some other type of growth, the amount of capital they have available to them gives the company leverage to make that growth happen.

What is the Stock Market?

There isn’t one central “marketplace” where stocks are traded, there are actually a few different major markets that are tracked by “market indexes.”

In the United States, the major markets are NASDAQ and NYSE but there are many other markets in economic powerhouse countries like Japan, China, and the UK. Each market will have a collection of “indexes” which are composites that follow the activity of the stock market on a broad scale. When you hear that the market is “up” or “down” it’s usually a reference to the reports from a market index. You may have also heard the terms “bull market” and “bear market” used to explain how the markets are performing. A “bull market” refers to a marketplace that is full of investor confidence with lots of buys happening where a “bear market” means the opposite – investors are pulling out their money and prices are falling.

The US alone has over 5,000 different market indexes, but the major players in this space are the S&P 500, the Dow Jones Industrial Average, and Nasdaq Composite. These indexes will hold shares of the largest companies in their preferred marketplace and consequently are seen as good barometers of overall market performance.

How to Decide Where to Invest

Depending on your goals, there are a few different ways you can invest with stocks:

Individual shares – This is where you go straight to the company and buy shares of their available stock. Often this is done via a broker like Fidelity, Robinhood, or Charles Schwab. The broker will buy the shares on your behalf through the stock market, but you will be the owner. Previously there were commission fees associated with the buying and selling of stocks through brokers, but many now have waived their commission fees, making it free to invest.

There are two different types of shares: common and preferred. The main difference in these is that common shares normally have voting rights in company operations like Board appointments where preferred stock does not.

Exchange-Traded Funds (ETFs) – ETFs are pools of shares from a variety of different companies, so rather than having your investment fluctuate from one company, your investment is more secure since it’s being spread through multiple companies. These are great for investors who want to broadly invest in one category of companies, like tech or even cannabis now, and want to hedge their bets in a less volatile way. The downside to ETFs is that short-term investors looking for quick pay-offs will likely not see the returns they’re looking for as fast as they would like.

Mutual Funds – Similar to ETFs, mutual funds are also pools of shares in a collection of different companies and may also include assets besides stocks like bonds and money market investments. If your employer offers a 401k or some other retirement benefit, it’s most likely invested into a mutual fund. Mutual funds have different fee structures than ETFs as they’re more manually managed by a fund manager or investment adviser.

Bonds – Bonds are similar to stocks in that they are an investment into a company, but are also available from governments, too. Bonds are normally preferred investments for those who are looking for slow but secure growth from their investments (like those who are nearing retirement age). While they’re not as dynamic as stocks, having some part of your portfolio invested in bonds is a smart way to secure your wealth against market fluctuations.

There are many ways to create profitable investments through the stock market which is why we offer our Capital Markets Professional Certificate for those who are looking for a comprehensive program that will help them learn how to utilize a number of market instruments to their fullest. Click here to learn more about the Capital Markets Professional Certificate and when our next classes will run.

Related Courses: Capital Markets Professional Certificate

This introductory program offers a comprehensive survey of capital markets. Money and banking, the role of central banks and the evolving regulatory landscape are reviewed. The program also provides a thorough grounding in the full range of capital market instruments.

About The New York Institute of Finance

The New York Institute of Finance (NYIF) is a global leader in professional training for financial services and related industries. NYIF courses cover everything from investment banking, asset pricing, insurance and market structure to financial modeling, treasury operations, and accounting. The New York Institute of Finance has a faculty of industry leaders and offers a range of program delivery options, including self-study, online courses, and in-person classes. Founded by the New York Stock Exchange in 1922, NYIF has trained over 250,000 professionals online and in-class, in over 120 countries.

See all of NYIF’s training and qualifications here.

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