Understanding Stocks & Shares for Beginners

Educate yourself about Wall Street before taking a walk.

Educate yourself about Wall Street before taking a walk.

Millions of investors own stock shares, but it is important to understand the stock market before diving head first into what sometimes turns out to be a dangerous pool. Many people become rich through stocks, but others lose fortunes. The better you come to understand markets and how they work, the better you’ll be able to make smart investment decisions about which stocks to buy and when to get in or out of the market.

Educate Yourself

Step 1

Educate yourself by reading newspapers, magazines and websites. The print and online versions major weekly news magazines and large city newspapers all have business sections and columns with practical advice.

Step 2

Watch television and listen to radio news and finance programs, which are also good information sources. Cable television financial channels regularly feature stock news and in depth programming. Public radio stations have daily news programs with stock market updates.

Step 3

Look at websites for any of the individual stock exchanges, which are chock full of generalized information and details about specific stocks.

Learn Key Terminology

Step 1

Familiarize yourself with key terminology like risk vs. reward, dividends, price-to-earnings, or P/E, ratio, common and preferred stocks, capital gains and cost basis. Brokerage firm and stock exchange websites all have glossaries of basic terminology. A book on investment basics could also serve as a starting point for learning popular terms.

Step 2

Become acquainted with different type of stocks, like growth or value, by learning what those terms mean. A prospectus for a mutual fund that invests in these types of stocks offers a good overview of the objectives of these types of investments.

Step 3

Understand the underlying risks and rewards associated with each. Many brokerage firm websites post a chart indicating the level of risk for certain investments, or a financial advisor can provide guidance. Customer support specialisits -- easily accessible through toll-free phone numbers -- at the large brokerage firms will not recommend one investment over another, but they will tell you whether or not an investment is considered high risk.

Understand Tax Consequences

Step 1

Learn about tax consequences of stock investing, like capital gains taxes and taxes on dividends. The IRS website has step-by-step instructions on tax rates for different investments. Tax preparation software also has tutorials and help menus that explain tax implications.

Step 2

Figure out which securities investments are best held within tax-advantaged retirement accounts. Read 401(k) or IRA account literature to understand how, and when, those accounts are taxed.

Step 3

Make sure you know how to maximize your overall returns by minimizing your income taxes.

Take a Class

Step 1

Take a class on investing. Many cities have adult education programs that offer courses on stocks or on other personal finance topics. Ask the registration staff how long an instructor has been teaching, and you can be confident that it is a reputable class if the instructor has been around a long time.

Step 2

Pick the instructor’s brain and ask lots of questions.

Step 3

In lieu of a class, you can also take an online tutorial offered by a brokerage firm or a local college extension program. You'll know the program is trustworthy if it sticks to basic information and does not try to sway you toward a specific investment.

Research Mutual Funds

Step 1

Look into mutual funds as well as individual shares.

Step 2

Read a fund's prospectus with an eye to understanding why the professional fund manager picks particular stocks or takes a certain investment strategy.

Step 3

Track the fund's performance and look to see how similar types of funds perform by comparison. Business sections in the newspaper publish stock and mutual fund performance charts, or these can be found online.

Tips

  • Realize that there are two ways to make money in stocks: through dividends and through price growth or capital gains. Analyze your objectives and determine whether stocks that return high dividends are best for your portfolio, if you should be looking for capital gains or if you should look for something in between.
  • Don’t overlook materials made available by brokerage firms. While those companies do have something to sell, reputable firms have no vested interest in selling one stock versus another, and their websites and printed materials are filled with insightful information.
  • Before committing to buying individual stocks, take some baby steps by investing in mutual funds. Funds have low entry costs and offer diversification, which reduces risk. They’ll also teach you about the ups and downs of the market and give you a sense of your personal level of risk tolerance.
  • Dip your feet into investment waters by participating in an online stock market game. You can practice trading in a realistic simulation before you commit real money.

Warnings

  • Attend free investment seminars, but look out for scams. Some seminars might be well worth your time, but others are thinly veiled attempts to sell a particular investment product. Before you take anyone’s advice or jump into a purchase, make sure to do additional research on your own.
  • Past performance is no guaranty of future returns. Stocks or mutual funds that were past winners might continue to do well, but you cannot rely on the past as a sign of the future. The stock market is notorious for alternating between bull and bear market cycles, and you need to understand that it’s just as easy to lose money as it is to make it.
  • Watch out for high trade prices. Full service brokerage companies charge high fees that make little sense for small investors. Discount firms – many of them online – are considerably more affordable, and many further reduce prices if you set up recurring purchases.

About the Author

Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.

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