Stock Market

The basics

The stock market is complex, but it runs on basic economics. When you buy stock, or shares, you're buying part ownership of a company. Ideally, you buy at a low price, sell at a higher price, and make a profit.

A stock exchange is the common ground where buying and selling, or trading, takes place. You've heard of the New York Stock Exchange, the American Stock Exchange, or NASDAQ. Much stock market trading is now done online.

In general, the value of stock is determined by supply and demand. If ABC Company is booming and the future looks good, stock will be worth more on the market than DEF Company, whose sales have dropped.

Buying Stock

You can invest in just about anything, from bananas to wind power to internet start-up companies. Online stocks are easily available. To minimize your risk, invest in an industry you understand.

There are two types of stocks: common, and preferred.

• Common stocks pay fluctuating dividends, and every share gives you a vote in the company.
• Preferred stocks pay regular, fixed dividends, and you have no voting rights. The company pays dividends on preferred stocks first.

Research is your best friend. People will offer you stock market secrets, or tips on stocks and bonds, but check them out yourself. Rumors are as common as mosquitoes in a swamp.

If you're ready to buy stocks, you need to act through a broker or brokerage firm.

Choosing a Broker

A licensed broker can be one person, or a company. Many specialize in online trading. Stock market investing has fees and legalities attached, and a stockbroker takes care of these. You can opt for a full-service or discount brokerage.

• A full-service broker charges a higher fee, but gives extensive information and advice, and helps manage your portfolio.
• A discount brokerage charges a much lower fee, and you do the legwork. If you don't mind doing research, watching the market and making decisions on your own, you can save money with a discount brokerage. If your time, patience or knowledge is limited, you might want the full-service package.

Do your research before choosing a broker. If you prefer face-to-face meetings, look into a local company. Otherwise, online stockbrokers are abundant. Make sure to choose a broker you can trust.

Stock Market Tips

From stock market guru Warren Buffett, to stock market scoundrel Carl Icahn, every sharp investor gives the same tips for success.

• Look at the company's past performance, and the economic factors surrounding its growth or decline. Know the key players of the corporation, and their policies. Study the market, and make informed decisions.
• Know what you're willing to risk. Buying stock in a start-up is riskier than investing in a trusted brand name. The start-up offers cheap stock and the possibility of higher profits, but it's also more likely to fail. The brand name is usually steady and reliable, but low risk often means low return.
• Diversify your portfolio. Diversity is the key to safeguarding your profits. Buy stock in more than one company. If one investment is down, you have others to boost your earnings.
• Never act on impulse or emotion. Don't buy into a green energy company because you believe in recycling. Buy because they have a strong product, a solid marketing strategy and performance record, and good potential for growth.

With a few basic principles, you're well on your way to stock market success.

by M.J. Holliday