Most people have heard of stocks, but few people know how they actually work. As with any investment strategy, you’ll want to get a grasp on the basics before investing in stocks. Here are five things to consider before you buy stocks.
1 – There Are Two Major Stock Markets
The stock market isn’t a single entity. The two major American stock exchanges are the New York Stock Exchange (NYSE) and the NASDAQ Stock Market. They operate differently from one another.
The NYSE is auction-based with buying and selling occurring between individuals. In the NASDAQ, dealers are doing the buying and selling. Another key differentiation is that companies listed on the NYSE are considered to be more secure (less volatile) whereas NASDAQ companies are riskier but more growth-oriented.
2 – The Stock Markets Take Holidays
With all the activity and online tools, it’s easy to assume that the stock markets are going 24/7. But the fact is trading only happens during regular business hours. There are also NYSE holidays and NASDAQ holidays when the stock market is closed for the day. The stock markets are closed on the weekend, but on open weekdays there are pre- and after-hours trading that can be done. Keep this in mind when you’re trading stocks.
3 – Stocks Can be a Short-Term or Long-Term Investment Strategy
You’ve probably heard stories of people who get rich virtually overnight by purchasing stocks that quickly appreciate in a matter of months. While it is possible under special circumstances, those are very rare occurrences. In actuality, stocks are a long-term investment strategy.
It’s important to know when to purchase and when to sell. Short-term trading (stocks held for less than a year) is a strategy, but most experienced investors will tell you the safer bet is to hold on to stocks for a while to gain real appreciation. You’ll also avoid short-term capital gain taxes by using the buy and hold strategy.
Keep this in mind when deciding if the time is right for investing or saving. In general, if you haven’t saved at least three months worth of expenses you need to save up before you start investing.
4 – ETFs Are a Low-Risk Way to Get Into Trading Stocks
Investing in stocks can be risky. It’s more volatile than other types of investment like bonds. But you can mitigate some of the risks by purchasing an exchange-traded fund (ETF).
An ETF is a bundle of assets managed by a brokerage firm that often include stocks and are traded on the stock exchanges. Because the ETF has a variety of assets the diversification lowers the risk. If this is an investment that interests you focus on market ETFs that are set up to track the indexes like the NASDAQ. There are also foreign market indexes, inverse ETFs and actively managed ETFs.
5 – You May be Able to Get Stock in Your Own Company
Some employers offer employees the opportunity to own stock in the company. Often this is in exchange for a lower salary or as part of a benefits package. While this can be a very tempting prospect you have to take extreme care with stock in any individual company, including your own.
Not every company is the next Facebook. Be very honest with yourself about the stability of the company. Scrutinize the company’s performance over the last several years or it’s potential for growth if it’s a startup. Leadership is also a key consideration. Do you have confidence in the leadership’s ability to expand and grow the company? And how much do you believe in what the company’s doing and its future?
Owning stock in your own company can be very rewarding and provides a sense of partnership rather than simply being an employee. Just remember, you may be getting the stock for “free”, but it could end up costing you.
Knowing the basics and how stocks work is a crucial part of the investment process. Take the time to discuss your options with a financial manager or hire a brokerage firm with a solid track record to manage your portfolio. These professionals can provide expertise and guidance that improves your chances of making a smart stock investment.