How Does Investing in the Stock Market Work?

by Jennifer Sable, Demand Media

    Working to make a living can sometimes be exciting, sometimes be boring, and sometimes be rewarding. Even if you earn a living doing something that you love, it's still work, and you're at it far more often than you do anything else. Investing in the stock market is attractive because it offers the option to make money in your sleep, and gives you the peace of mind to know you have money in the bank.

    Definitions

    The stock market is a broad term that describes all markets where stocks are traded. Stocks are shares of ownership in a company, which the company issues in order to raise money. The stocks are then traded between individuals on an open market, although it is possible to purchase stock directly from the issuing company. When you buy stock you own in interest in the company -- in fact, the company itself must retain 51 percent of shares at all time in order to make decisions.

    Process

    To purchase stock, you must sign up for a trading account. You can trade with a professional broker who is trained to offer financial planning advice, or you can register for an online discount trading account and do it yourself. Either way, you will pay for service, but whereas with a trader you pay high fees for high servicing, in a do-it-yourself account, you only pay transaction fees. Typically you put out a market order, which means to buy a stock at the current market price, although more sophisticated trades exist as well.

    Knowledge

    Investing in the stock market is all about choosing the right stocks. The Motley Fool recommends to buy solid companies and stick with your stocks for the long haul in order to get the best investment. The best way to learn about the markets and stock picks is to read publications and web sites such as The Wall Street Journal and Bloomberg that are updated daily and follow business news. Familiarize yourself with financial terminologies and learn how to analyze income statements and balance sheets. Even if you go with a broker, you want to understand what's happening with your money.

    Purpose

    Invest money in order to see returns. Develop some sort of strategy that could include high value, high growth or strong diversification. After choosing stocks, monitor their performance in order to know when to sell. If you are going really long, you won't need to place as much emphasis on short term performance. When you decide to sell, simply place a sell order through your brokerage account. Investors pay taxes on stock returns, so keep that in mind when calculating earnings.

    Alternatives

    Take advantage of all the rewards the stock market has to offer through purchasing mutual funds instead of individual stocks. You will be investing your money in the stock market, but you won't have to complete transaction yourself. You can join a mutual fund by calling the fund family and purchasing shares. The benefits of this method are that you don't need to worry about picking stocks yourself, and you get an automatically diversified portfolio, since the fund manager takes care of these elements. In a no-load fund, you also won't have to pay any transaction fees.

    About the Author

    Jennifer Sable has been freelance writing since 2007. She has written copy for Pretty Me Maternity and frequently reports for 100 Ftse Index News in addition to other fashion and business websites. Mrs. Sable holds a finance degree from Yeshiva University and a Masters of Arts in public administration from New York University.