Investing in the stock market 101 for dummies

This is typically done on a two-to-one ratio. The number of shares changes, but the overall value of your holdings remains the same. Stock splits sometimes occur when prices are increasing in a way that deters and disadvantages smaller investors. They can also keep the trading volume up by creating a larger buying pool. Note Expect to experience a stock split at some point if you invest in individual stocks.

Stock Value vs. Price A company's stock price has nothing to do with its value. The relationship of price-to-earnings and net assets is what determines if a stock is overvalued or undervalued. Companies can keep prices artificially high by never conducting a stock split, yet not have the underlying foundational support.

Make no assumptions based on price alone. What Are Dividends? Dividends are usually cash payments that many companies send out to their shareholders. Dividend investing refers to portfolios containing stocks that consistently issue dividend payments throughout the years. These stocks produce a reliable passive income stream that can be beneficial in retirement.

You can't judge a stock by its dividend alone, however. Sometimes, companies increase dividends as a way to attract investors when the underlying company is in trouble. Note Ask yourself why management isn't reinvesting some of that money in the company for growth if a company is offering high dividends. Blue-Chip Stocks Blue-chip stocks—which get their name from poker, where the most valuable chip color is blue—are well-known, well-established companies that have histories of paying out consistent dividends regardless of the economic conditions.

Investors like them because they tend to grow dividend rates more quickly than the rate of inflation. An owner increases income without having to buy another share. Blue-chip stocks aren't necessarily flashy, but they usually have solid balance sheets and steady returns.

Preferred Stocks Preferred stocks are very different from the shares of the common stock most investors own. Holders of preferred stock are always the first to receive dividends, and they'll be the first shareholders to get paid in cases of bankruptcy. The stock price doesn't fluctuate the way common stock does, however, so some gains can be missed on companies with hypergrowth. Preferred shareholders also get no voting rights in company elections.

Finding Stocks for Your Portfolio Investment ideas can come from many places. You can take a look at your surroundings and see what people are interested in buying if spending your time browsing investment websites doesn't sound appealing.

Look for trends and for the companies that are in positions to benefit you. Stroll the aisles of your grocery store with an eye for what's emerging. Ask your family members what products and services they're most interested in and why. Note You might find opportunities to invest in stocks across a wide range of industries, from technology to health care.

It's also important to consider diversifying the stocks you invest in. Consider stocks for different companies in different industries, or even a variety of stocks for organizations with different market caps. A better-diversified portfolio will have other securities in it, too, such as bonds, ETFs, or commodities.

How To Buy Stocks You can buy stock directly using a brokerage account or one of the many available investment apps. These platforms give you the options to buy, sell, and store your purchased stocks on your home computer or smartphone. The only differences among them are mostly in fees and available resources. Both traditional brokerage companies such as Fidelity and TD Ameritrade, and newer apps such as Robinhood and Webull offer zero-commission trades from time to time.

That makes it a lot easier to buy stocks without the worry of commissions eating into your returns down the line. Note You can also join an investment club if you don't want to go it alone. Joining one can give you more information at a reasonable cost, but it takes a lot of time to meet with the other club members, all of whom may have various levels of expertise.

You might also be required to pool some of your funds into a club account before investing. Use Your Retirement Account Another way to invest in stocks is through your retirement account. Promotion Exclusive!

Tiers apply. A market index tracks the performance of a group of stocks, which either represents the market as a whole or a specific sector of the market, like technology or retail companies. Investors use indexes to benchmark the performance of their own portfolios and, in some cases, to inform their stock trading decisions.

You can also invest in an entire index through an index fund or exchange-traded fund, or ETF , which usually tracks a specific index or sector of the market. And most investors would be well-advised to build a diversified portfolio of stocks or stock index funds and hold onto it through good times and bad. But investors who like a little more action engage in stock trading.

Stock trading involves buying and selling stocks frequently in an attempt to time the market. The goal of stock traders is to capitalize on short-term market events to sell stocks for a profit, or buy stocks at a low.

Some stock traders are day traders, which means they buy and sell several times throughout the day. Others are simply active traders, placing a dozen or more trades per month. Interested in individual stocks? View our list of the best-performing stocks this year. Investors who trade stocks do extensive research, often devoting hours a day to following the market.

They rely on technical stock analysis , using tools to chart a stock's movements in an attempt to find trading opportunities and trends. Many online brokers offer stock trading information, including analyst reports, stock research and charting tools. Learn the basics of how to read stock charts. Bull markets are followed by bear markets, and vice versa, with both often signaling the start of larger economic patterns.

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