How to invest in the right types of stocks

Posted October 30, 2008 by Bernz

Stocks and stock markets can be really confusing! This article will clear up a few misconceptions and help you understand how stocks and markets work and how to invest in the stock market.

By Dustin M.

Quite simply, stocks or shares are small parts of a publicly traded companies. Companies sell these parts to raise capital for future investment in buildings, employees, and other resources. There are two types of stocks or shares called, common and preferred.

Common stock

Common stock/shares is the most common kind as you can imagine. This is the kind of stock traded on the stock market every day. It is the kind of stock that is bought for mutual funds and 401K plans.

Preferred Stock

Preferred stock/shares are high level, very expensive stocks. Sold only to hand-picked investors by companies with stocks that run into the thousands of dollars. Usually founders of the company and their friends end up with these privileged shares. Also, private banks also tend to hold these shares as well. These are not often traded on the open market because people who own these shares tend to sit on the board of the company or have other controlling interest.

Stock Markets

The idea of an open market where intangibles could be bought and sold started with the unlikely thing of Tulips in Denmark. During the 14th century the tulip market was hot and shares in tulips traded for hundreds. It was the first traded commodity and the first modern market.

This concept was revived again in the 18th century (the tulip market crashed within 10 years of its creation) in Great Britain where such markets in one form or another have existed.

Large standardized markets that we see now have been a fairly recent invention. In the 19th century there were hundreds of exchanges that companies could be on.  Most countries have 1 or 2. The United States has 3 stock exchanges, the NYSE, the NASDAQ, and the Standards and Poor 500.

The NYSE is the top 60 so-called Blue Chip stocks. With companies like Dow, Dupont, Boeing, Walmart, and other large companies. This stock exchange represents the 60 largest and riches companies. The NASDAQ was a little known exchange until the 1980’s when it started accepting the technology stocks that were not large enough for  the NYSE. The S&P 500 (Standards and Poor) represents a wide variety of companies in several industries and is an excellent indicator of the economy because of its wide diversity.

401Ks and the Stock Market

So now that we know what a stock is and what a stock market is, then how much does this affect retirement accounts and such? Basically your 401K program (called a 401K because of the tax code) invests in several different mutual funds and stocks and as you fund your 401K the returns from those investments can be (and often are) reinvested so that your money continues to make money. The hitch is that you don’t have access to the money without tremendous tax fees. The advantage is that you save on taxes and the contributions are tax deductible. Companies typically have this program for their employees and most Americans have them or have access to them.

How to invest stocks

Invesco, Scottrade, Smith Barney, and Edward Jones and other such companies make it easy for you to invest in the stock market privately. Your minimum investment is the price of one share of a stock that you want to buy into. There are other considerations as well, please see our article on how to invest in the stock market.
Day trading vs. Longterm

Ever since the internet and companies like Scottrade came out with the ability to trade multiple shares a day, day trading has been something that certain people have dabbled in and a select few of those people have made some big gains from it.

The stock market is something that will not give you tremendous returns in excess of 2-3 percent very often.  With that in mind day trading can yield great returns, but it can also result in a great deal of loss.

Personally, I invest with the long term in mind.  Constant funding and saving into these investments (be they individual stocks, mutual funds or money market accounts) you can realize large returns over time. However, if you want to do the research and the constant monitoring that is required of the day trader then you are welcome to do so.

Wrap up

In short, this should be a quick-start guide to stocks and the stock market for you and I hope you find it helpful as you breakout into other investments. Please look for other articles here about other investment types.

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This entry was posted on Thursday, October 30, 2008 at 4:35 pm and is filed under Investing Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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