The Stock Market Made Simple
The words "stock" and "market" are not just for men in suits who read the The Wall Street Journal and use "vacation" as a verb. No, in fact these words should be part of a mom's dialogue as well. Why? Because if you're serious about investing and saving for your future (and not becoming dependent on your kids one day), the stock market is your vehicle for getting there.
The stock market in five steps:
- What is a stock?When you buy a stock, you're buying a piece of a company. Companies need your money to keep growing. So, you put your money into businesses hopefully because you believe in them and if they do well, your investment will be worth more than it was when you purchased it.
- What is the stock market? You've probably heard of some of the major stock markets already: NASDAQ (National Association of Securities Dealers Automated Quotations), AMEX (American Stock Exchange) and the NYSE (New York Stock Exchange). Well, there are also state stock markets such as the Philadelphia Exchange and Chicago Exchange, and even electronic exchanges like Archipelago. Stock prices rise and fall on these trading floors based on how well businesses are doing. Because investing in stock is so risky and companies succeed and fail, you should never invest more than 10 percent of your money into one individual stock.
- Why are stocks good? You might be thinking it's simpler and safer to just keep your money stored in the bank. That's partly true, but not really your best move. Stocks offer the highest rate of returns to investors and the younger you are (meaning the longer you have until retirement), the better it is to invest in stocks so your chances of making your money grow are greater.
- How do I use the market? Today's market can go up and down by 200, even 400 points (points = dollars). So to make sure you don't buy at either too high a price or too low, the best strategy is to move around your money in small chunks over a period of time. This is known by us eggheads as "dollar-cost-averaging," a fancy term for making sure you're not buying stuff at the worst price. Think about it: Don't you hate it when you find out that the fab sandals you bought two weeks ago your BFF got on sale for half off? Same thing in the stock market.
- How do I invest in the stock market?
If you're a first-time investor, look for companies that have been around for awhile and have a history of excellent earnings. You can see how each company is doing in the market by visiting the websites of specific exchanges such as the American Stock Exchange, Nasdaq Stock Market or New York Stock Exchange. Not only do you want to see how the stock is performing in the market today, you should check how the company has performed in the past. You can check a company's financial reports at each company's website or at the SEC's Edgar database.
If monitoring the market seems too daunting, you can get a financial advisor. Call your local bank or visit the Financial Planning Association to learn what to look for in an adviser and how to find one in your area. You can also get started by visiting the websites of popular investment firms such as Charles Schwab, Vanguard, T.Rowe Price, and E Trade Financial to find out the best plan of action for you.
The takeaway: Believe it or not, the stock market is one of your biggest allies in saving up enough money for retirement. Over any 20-year period of time, including the Great Depression, the stock market has guaranteed a return on your money—on average, an 11 percent growth. Who'd want to miss out on earning 11 cents on every dollar? That's what the stock market can do, but you've gotta know how to use it.
Want more money-saving tips? Check out our Recession Proofing Boot Camp!