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How The Market Works: Tips for Beginner Investors

Knowing how the market works can make you an intelligent investor. If you want to build wealth, investing in the stock market is really one of the best ways to do it. Indeed, most of the world’s wealthiest individuals own some piece of a company.

But some of us don’t invest in the stock market either because we think we have very little money to invest, or because we don’t know how the market works.

Or, we think investing in the stock market is risky business.

Who could blame you!

After the 2008 financial crisis, investing in the stock market got scarier. But if you really want to grow wealth through stocks and don’t mind the risks that come with it, you must know how the stock market works.

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Luckily for you, investing in the stock market is easy. It is also something that can be learned. No one is born knowing how to invest. The difference between those who know how the market works and those who don’t is is that those who do take the time and learn how it works.

I don’t want to scare you into quitting your job and become a full-time stock investor. If that’s what you want, yes, you have that option. But if you want to go on with your daily life, while at the same time building wealth, you can.

Investing intelligently can be done passively without taking a lot of your time. And you don’t need to have a fancy business degree or PHD in order to start investing.

But you do need to understand how the market works. Doing so can help you avoid many bumps and can help you tremendously.

Investing in the stock market, however, is not a guarantee of wealth. Just as you can make a lot of money, you can lose all of your money in a heartbeat.

So you must have the stomach to take the risk. Indeed, any investment vehicle with great potential to make you rich also comes with great risks. Your shares can be worth $1 Million today, but worth $500 within a matter of seconds.

So, don’t rush into investing if you’re not ready. Knowing how the stock market works is one thing, investing in products you understand is quite another.

So if you’re comfortable taking some risks, let’s see if we can learn how the market works.

See: How to Invest 100k to Build Real Wealth?

How the stock market works?

A better understanding of how the stock market works starts with knowing the basics. That means, what is the stock market? what are stocks? How do you buy and sell stocks them? Why companies issue stocks?

What is the stock market?

The stock market, simply stated, is a collection of markets or exchanges where people buy and sell stocks. Very simple.

The stock market works like an auction, really. It is a place where buyers and sellers come together to bid on something. It can be a car, a piece of art or some tangible goods.

The crazy thing about the stock market is that there is no tangible good. Unlike a piece of art, you cannot touch or see a stock. The stock market is where people trade shares electronically. But apart from that the market works in the same way like an auction.

You’ve probably heard of the New York Stock Exchange (NYSE)! Well, if you haven’t, it’s where people buy and sell stocks of a company. It’s indeed one of the two largest public exchanges in the world. It lists 2400 companies. The other largest one is the Nasdaq. It lists 3800 companies.

There are several other exchanges like the Tokyo Stock Exchange or Shanghai Stock Exchange. So individual stocks will trade on one of those exchanges.

Now that you have an idea of what the stock market is, you might be asking yourself this next question: what is a stock?

What is a stock?

A stock is a share of ownership in a company. For example, if you want to own a piece of a public company likeTesla (the company that makes those beautiful and shiny cars), you can! You simply buy a share or shares of Tesla through a brokerage firm.

And anytime someone buys a Tesla car, Tesla makes money. And you, in turn, makes money because you own a piece of the company.

Likewise, if you own shares of Apple, anytime someone buys an ipad, iphone, ipod, and so on, you make money.

So, by now, you may have an idea of what a stock or a share is and how the market works. Let’s take another example of how owning shares of a company can make you money.


Still not sure how the stock market works? Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.


How do you make money in the stock market?

You can make money with stocks in two ways: through capital appreciation and income from dividends.

Appreciation. Suppose you own shares of Starbucks, which you bought at $90 a share. If the price of Starbucks rises to $135 the next year, you have made yourself a 50 percent profit on your original investment. That’s called capital appreciation. Your share value has appreciated. But that’s not the only you can make money in the stock market.

You can also make money in the stock market through dividends, which are payments companies make to their shareholders.

Dividends. Some companies also pay shareholders dividends. Let’ say the current dividend per share is 50 cents per quarter. So every 90 days you will make money. In other words, even if the share of Starbucks stays the same in price or decrease in value the next year, you will still make money via dividends. So as long as you hold Starbucks stocks, you get dividends.

You can get those dividends as a cash payment or you can reinvest them by buying more shares of the company.

However, not all companies pay dividends. And even those that do give out dividends have no obligation to do so. Think of dividends as a company bonus.

Why do companies sell or issue stocks?

Companies sell or issue stocks mainly to raise money to grow their business. Most people when they start a company, they usually start with getting a personal loan. Then the next step is that they go to a bank and ask for a business loan.

Once the company starts to grow, and they want to take the company to next level, then they need more money to expand. The best way to do that is by listing shares of the company’s stock through a process called Initial Public Offering (IPO). So investors like you an I can buy these shares.

How do you buy and sell stocks?

Part of knowing how the market works is knowing how to buy stocks. Buying stocks is easy. With a click of a button, you can buy and sell shares of companies. There are a few ways you can buy stocks.

You may buy stocks through a 401k plan. You may have already bought stocks already without knowing it. If you have a 401k account, then you have indirectly bought stocks through your employer’s 401k plan.

You may also pay a fee-only financial advisor who would buy stocks for you and manage them for a fee of 1 percent of assets. The advantages of using a financial advisor can be well worth any additional cost if you’re getting started or don’t have time to do your own research.

But buying and selling stocks on your own can be rewarding.

Buying stocks through a stockbroker

The most common and easiest ways to buy individual stocks is online through a brokerage firm. To buy stocks through a stock broker, you’ll need to open a brokerage account.

You will be required to provide certain personal information such as proof of identity and tax information.

The best brokerage firms out there are:

  • M1 Finance
  • TD Ameritrade
  • Fidelity
  • Charles Schwab
  • E-trade
  • Webull
  • Merrill Edge

Stockbroker’s costs

When you buy and sell stocks on the stock market, you pay a brokerage fee for each trade. Brokerage fees vary between stockbrokers depending on the services they offer. A brokerage fee can $20 for each trade.

For example, you’re buying 20 shares of Apple at one time (that is a trade), then you might be paying a $20 brokerage fee.

Once you buy stocks through the stockbroker, you will get an email stating that your order or trade takes place.

So if you’re just getting started and you don’t feel confident to buy your own stock, then the advice of a professional may be worth it. However, if you’re confident and know by now how the market works, you may go with a no advisor.

Buying stocks through mutual funds

Another way to buy stocks, is not to buy stocks individually, but through mutual funds. This is good option if you are a beginner investor with very little money to invest in the stock market.

A mutual fund is an investment company where you buy stocks and bonds. A professional manager will pool your money and that of other investors together and invest it.

Buying stocks through a robo-advisor

Another way to buy stocks and start investing in the stock market is through a robo-advisor like Acorns.

Acorns takes your spare change from your regular transaction and invest that change for you in a range of exchange-traded funds (ETFs). It rounds up all your transactions to the nearest dollar. And once the spare changes stack up to $5, Acorns will invest it for you.

That means if you spend $5.55 at the grocery store, 45 cents get dropped into your Acorns account. And Acorns invests it for you. The idea is that you will not miss this spare change and because the investment is automatic, it adds up fast.

While Acorns is not ideal if you want be rich, it’s a very good option for beginner investors while learning how the stock market works.

Plus, Acorns will give you a $5 bonus just for signing up

M1 Finance is another robo-advisor where you can buy your stocks.

In fact, it’s a great way to invest in ETFs and index funds without worrying about picking up your own individual stocks.

M1 Finance is perhaps the best robo-advisors out there, not only because the account minimum is pretty low ($100 minimum account), but also there is no maintenance fee. That is a big advantage, especially if you have very little money to invest.

Plus you get a $10 when you refer a friend or family member. They will then use that referral link and fund their account with that $100 account minimum.

To get your referral money from M1 Finance, visit its website.

Bottom line is the stock market works by having investors to buy and sell stocks. While sounds simple, investing in the stock market can be intimidating and confusing. So, if you want to build wealth in the stock market, you must have an understanding of how the market works.

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Still wondering how the market works? A financial advisor can help!

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

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