The stock market represents an aggregate of buyers and sellers of stocks or shares of companies listed on a particular stock exchange. It provides a platform for publicly-traded companies to raise capital and for individual retail and institutional investors to own shares in these companies and make money from doing so. So how does one invest in the stock market?
A Basic Guide to Investing in The Stock Market: Two Ways to Invest in Stocks
Entering the stock market is relatively easy. Even beginners or those who do not have a background in finance and investing can readily purchase stocks in the comfort of their homes. This article enumerates and describes two general ways to invest in stocks.
Direct Investing: Buying Stocks Through Brokers and Trading Platforms
One of the easiest ways to invest in the stock market or purchase individual stocks is through stockbrokers. Modern transactions now transpire online.
An individual can start purchasing stocks of selected companies and build his or her portfolio through online brokers such as Fidelity Investments and Charles Swab in the United States or Hargreaves Lansdown and Interactive Investor in the United Kingdom.
Note that each country has its own stock market and stock exchanges. This also means that each country has its own pool of stock brokerage firms.
It is also important to note that most online trading platforms are also stock brokers. Some of these operate across different countries. Consider the Israeli firm eToro as an example that operates offices in Cyprus, the United States, and the United Kingdom.
Participating in the stock market through online-enabled brokers and trading platforms are as easy as purchasing an item online.
Indirect Investing: Investing in Stocks Through Asset Managers and Pooled Funds
Another way to participate or invest in the stock market is through so-called indirect investing. Compared to direct investing which involves purchasing stocks directly through brokers or trading platforms, indirect stock investing involves mediation from asset managers.
So-called asset management companies offer pooled funds to their clients. They fundamentally pool money from their client base and invest these in so-called pooled funds.
Most of these companies have pooled funds composed purely of stocks or equities. These funds are called equity funds and equity index funds. Some funds include a mixture of different asset classes and securities such as stocks and bonds.
Specific examples of pooled funds are mutual funds, exchange-traded funds, unit investment trust funds, and even investment-linked or unit-linked insurance plans.
Asset managers oversee the management of pooled funds. They decide on which companies to invest in and how much to invest. Furthermore, these companies can either actively or passively manage the composition of these funds.
Note on Investing in The Stock Market: Choosing Between Direct and Indirect
Stock market investing has the potential to generate money. Investors can earn in two ways: either by purchasing stocks that pay dividends or through appreciation as determined by the rise of price per share to a level greater than the price when it was purchased.
Of course, investing in the stock market or purchasing stocks requires discipline and patience. Some earn from appreciation either through day trading or through buy-and-hold strategies. Others earn by holding their stocks for longer periods while enjoying both dividend payments and price appreciation.
Both direct investing and indirect stock market investing can help individuals or institutional investors earn money both through dividends and appreciation. The benefit of direct investing is full control of all investment decisions.
However, direct investing requires a certain level of expertise, especially when one wants to make money through appreciation and via stocks trading.
Direct investors must also understand the difference between trading and investing. They also need to use analytical tools and understand the relationship between stocks and bonds, the impact of interest rates in stock market performance, and other market indicators.
A disadvantage of indirect investing is that it removes all decision-making from investors. Indirect investing has the disadvantage of removing decision-making from the investors.
Remember that asset managers make all investment decisions. But indirect investing can be beneficial. It can give investors an assurance that their money and portfolio are managed by experts. There is also no need for fundamental and technical expertise.
In choosing between direct investing and indirect investing, the general rule is that it is better to have both to maximize their respective potentials and advantages while minimizing all involved risks.
Stock market investing has its pros and cons. Stocks are generally considered as high-risk and high-return securities. Profits from these stocks are not guaranteed. Some stocks and groups of stocks have different performance depending on market and economic conditions.
It is also important to take into consideration the different factors affecting the stock market and stock prices, particularly when it comes to choosing stocks and determining how much to invest.