There are several ways to deposit your money to work for you, i.e. invest. Potentially, investments generate returns to help you achieve your goals, build wealth, and secure your financial future.

However daunting it may be for beginners, investing in the stock market is an excellent way to grow your wealth over time. Therefore, it’s important to equip yourself with the right knowledge and approach before getting started. Discover some of the fundamental principles of stock market investing in this article.

What is the Stock Market?

The stock market is where investors buy and sell shares of publicly traded companies. This is managed through formal exchanges and over-the-counter (OTC) marketplaces, which operate under an established set of regulations.

When you purchase stocks of a given company, you become a part owner with a claim on the company’s assets and earnings. As a shareholder, you may also have the right to vote on important decisions.

Stocks are traded on stock exchanges such as the New York Stock Exchange (NYSE), the NASDAQ, the Tokyo Stock Exchange, and the Nairobi Securities Exchange.

Why Invest in Stocks?

Potential for High Returns: Stocks offer prospects for longer-term capital appreciation. Historically, stocks have provided one of the highest returns among various asset classes over a long period.

Dividend Income: Many companies apportion their profits to shareholders in the form of dividends. Investing in dividend-paying stocks could provide a steady income stream, which can appeal to income-oriented investors.

Tax Benefits: Depending on your jurisdiction and investment strategy, capital gains on your stocks held for a certain period may be taxed at a lower rate than ordinary income.

How to Start Investing in Stocks

1.   Educate Yourself: Before you begin investing, take the time to learn about how the stock market works, the different investment strategies, risk management, key investment terms and concepts, etc.

Numerous resources are available for this learning process, including books, online courses, podcasts, financial websites, and more.

2.   Set Investment Goals: Are you investing for retirement, college tuition, buying a house, or some other purpose? Understanding your goals will promote a better investment strategy and risk tolerance that you can handle.

3.   Open a Brokerage Account: To buy and sell stocks, you’ll need to open a brokerage account with a reputable firm, e.g. Fidelity Investments and JPMorgan Chase & Co.

Consider a broker who offers investment products that you’re interested in. Other factors to check out include fees and commissions, account minimums, customer service and support, security and regulation, reviews and recommendations, and trading platforms.

4.   Build a Diversified Portfolio: Spread your investments across different asset classes, industries, geographic regions, and types of securities. This practice reduces the risk of significant losses and optimizes returns in the long run.

 5.   Start Investing: Consider your investment goals and set aside the amount of capital you’re comfortable investing in the stock market. Once your brokerage account is set up, you can buy individual company stocks or invest in stock mutual funds that offer exposure to a diversified portfolio of stocks.

Key Concepts to Understand

1.   Stock Price: Also known as share price, is the amount it would cost you to buy one share in a company at a given moment in time. It’s determined by demand and supply dynamics in the stock market. For instance, if there’s a high demand for a stock and limited supply, the price tends to increase, and vice versa.

 2.   Market Capitalization: Sometimes referred to as market cap, it is the most recent total value of a company’s outstanding shares in the stock market.

Mathematically, it’s represented as:

Market Cap = Current Market Price per Share × Total Number of Outstanding Shares

 3.   Dividends: A dividend is a regular distribution of earnings by a corporation to its shareholders. When a company generates profits or surplus, it can choose to reinvest in the business or allocate them to stockholders in the form of dividends.

 4.   Risk and Return: Risk represents the possibility that your investment may not achieve its expected outcome or may result in a loss of capital. Conversely, Return refers to the gain or loss generated by an investment over a period of time.

The Risk-Return Tradeoff principle describes the relationship between these two concepts in that, generally, higher returns are associated with higher risk levels, and lower-risk investments tend to offer lower returns.

 Monitoring and Rebalancing Your Portfolio

Track your investments regularly to assess their performance and make necessary adjustments. Moreover, review your investment portfolio frequently to rebalance your asset allocation and ensure it remains aligned with your objectives and risk tolerance.

Investing in the stock market is beyond its basics. It requires staying informed, continuously monitoring your investments, and remaining patient and disciplined. Furthermore, avoid impulse decisions based on emotions or short-term fluctuations. With the above foundations, you understand what the stock market is, the benefits of buying stocks, and how to start investing in stocks. These are knowledgeable tools to embark on securing your financial future through stock market investing.