Wondering how the market works? Conventional wisdom seems to tell us that the stock market and Wall Street can make you rich – but how do stocks actually work?
It’s true that investing your money into stocks can be a great way to earn long term gains and potential returns. However, it’s not an overnight fix and there are risks involved. The good news is that there are ways to mitigate risks and invest smart.
We’ll go over the ins and outs of stocks and whether individual stocks are the best option.
What are stocks?
Simply put, stocks are shares of ownership in a publicly traded company. When you invest in a stock, you’re essentially buying small bits of that company. Companies issue shares to raise money, which they then use to expand operations, invest, or pay off creditors. People usually invest in stocks because they believe they will make money in one or two ways – either through an increase in stock price or dividends.
Investing in a stock means you expect the company to continue to grow and generate larger earnings in the future. When a company becomes more profitable, it’s stock price increases, and investors gain a return.
Some stocks will also pay out a portion of the company’s profits to investors in the form of dividends. Investors can pocket their dividend income or use it to buy more stocks.
How does buying stock work?
In order to buy stocks, you’ll almost always need to open your own brokerage account. You should be able to select the stocks you’d like to buy directly from your account. Some robo-advisors also provide investment portfolios with pre-selected stocks you can choose based on your risk preferences.
Is buying individual stocks the best investment option?
There’s more than one way to buy stocks. You can invest in individual stocks, mutual funds, or even ETFs. All of these can be a great way to get into the market, however some options require more research, or come with more fees than others. Here’s some information on how these investment options differ.
Individual stocks
Choosing individual stocks requires a ton of research. You’ll want to dig into each company’s financial reports and understand how they relate to their competitors. This includes industry analysis, business model analysis, growth analysis, as well as analyzing profit margins, P/E ratio, balance sheet, income statement, cash flow statements, and more.
Ultimately, you’ll also need to develop your own strategy to spot potential winners – and there can be a higher amount of risk in this option.
Mutual funds
A mutual fund is a professionally managed portfolio of stocks and other assets you can invest in by pooling your money together with other investors. Mutual funds take the hassle out of finding individual stocks by leaving it to the financial professionals. Ideally, these professionals manage the mutual fund in a way that it performs well in accordance with the overall market. However, there are typically fees associated with mutual funds.
Stock and bond ETFs
Exchange-traded funds (ETFs) are similar to mutual funds in that they don’t require you to pick individual stocks. However, while mutual funds incorporate professionals to manage the portfolio directly, ETFs track an entire market index – giving you more diversification and fewer fees.
ETFs can be one of the best strategies for investors that don’t have the time or expertise to pick and choose individual stocks.
Straightforward investing with MoneyLion
If you’re looking for fully managed portfolios without the hassle, time-commitment, or expensive fees – look no further than MoneyLion! MoneyLion offers diversified portfolios with stock and bond ETFs, fixed-income (bond) ETFs, and dividend-paying equity ETFs. You can customize each portfolio according to your own risk preferences, financial goals, and themes.
Best part? It’s available for only $1/month – no trading fees! And you can invest as little or as much as you want. There’s also bonus tools like Auto Investing to help you grow your savings faster. MoneyLion is committed to helping everyday Americans reach their financial goals by making investing approachable.
How do I sell my investments?
Ideally, you want to keep your money invested for the long-haul, since that’s the best way to capitalize on compounding. However, if you’ve already reached your goal and want to cash in on your stocks, know that your funds are always easily accessible.
MoneyLion allows you to sell and then withdraw funds from your investment account at any time.
