Understanding Stocks & Shares for Beginners

Educate yourself about Wall Street before taking a walk.
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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.

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