3 Must-Know Facts About The Stock Market
For many people, the stock market is shrouded in mystery on how it functions and operates. Most people just associate it with money! If you are ready to start investing, here are three must-know facts about the stock market.
Must-Know Terms
Let’s start with the basics.
Stock market - This is where investors buy and sell stock: specifically, shares of public companies. Consider it a trading game, but a bit more complex.
Stocks - When you buy stock, the company is agreeing to take your money and give you a partial ownership stake in the company.
Mutual funds - Jumping into a stock market and looking at all the options can be overwhelming. To make it a bit easier, there are pooled investments, like a bundle package, that are funded by shareholders and professionally managed. This helps you get the best bang for your buck by having a diversified portfolio.
Fact #1 – You Need Good Stock
It’s not worth your time and especially your money to invest in a company that is going downhill. The “gamble” in the stock market is finding the right company to invest in. There are a few ratios that help calculate the health and value of a company.
- Price-to-Earnings (P/E) Ratio – This is the most used financial ratio. Sometimes stock goes up without any real profit generating the climb. So, this ratio helps you determine how long it will take to make your money back or make more than your initial investment. Note, that when looking at (P/E) ratios, you should only compare companies in similar industries. Companies in the fast food industry operate drastically differently than companies that specialize in military defense contracts.
- Price-to-Book (P/B) Ratio – This ratio looks at the overall value of the company, which helps those who are more conservative with their investments. Instead of just looking at the stock of the company, this ratio looks at the company as a whole, including its land, buildings, equipment, etc. If the company goes under, you have a good idea of how much the company is worth if it needs to be liquidated, allowing you to make an informed investment decision.
Fact #2 – There Is No Guaranteed Formula To Make Money
Once you start investing, you may wonder, “When will I start seeing a return?” The real answer: there is no answer. Investment timelines are based on when you invested your money and who you chose to invest in. When you are ready to get your money back, whether you have made money or not, you need to wait for the trade to settle before you can withdraw your funds. Once the trade has settled, it typically takes about 2 business days to get your money. Overall, there is no real answer; it depends on your level of involvement when you decide to start investing.
Fact #3 – You Can Invest For Less Than $100
A common misconception is that it takes a lot of money to invest. Many people avoid the stock market because they don’t think they have enough money to start. Good news, there are investment options for everyone at every stage of life and wealth.
- For those who can invest over $1,000, you are probably looking at mutual funds. These are pricier investments, but you see your return come back larger.
- For those who need to start small, you can spend $100 or less on EFTs, or electronic funds transfer. Keep in mind this has a mild risk, mild reward system, but still a great way to start.
Don’t go into the stock market blind, and it’s definitely easier when you know these basics. If you want to start your investment journey, start with your local financial institution, they may have options for you or know where to point you in the right direction.