Stock Market Basics

Summary

• The stock market is where investors buy and sell shares that represent ownership in publicly traded companies.
• Common and preferred stocks give investors different rights and potential benefits.
• Brokerage accounts and investing platforms can provide access to stocks, but investing always involves risk.
• Stocks can play a role in long-term goals such as retirement, and understanding the basics can help you make more informed decisions.

Investing can seem complicated at first. Terms such as shares, trades, brokerage accounts and market swings can make it difficult to know where to begin. Understanding a few core concepts can make the stock market easier to navigate and help you decide how investing may fit into your broader financial plans.

What Is the Stock Market?

The stock market is where shares of publicly traded companies are bought and sold. A share represents a portion of ownership in a company. The terms "stock" and "shares" are often used interchangeably, although stock is a broader term that can refer to ownership across one or more companies.

Buying stock gives you an investment whose value can rise or fall. That potential for growth comes with risk, which is why it is important to understand what you are buying and how it supports your goals before you invest.

Understanding Different Types of Stock

Stocks are not all structured the same way. Two common categories of public stock are common stock and preferred stock.

Common Stock

Common stock represents partial ownership in a company. Shareholders may benefit when the company performs well and may lose value when it performs poorly. Common shareholders may also have voting rights on certain company matters, including leadership or corporate policies.

Preferred Stock

Preferred stock generally has different terms than common stock and may provide dividend payments based on the stock's stated terms. The original source illustrates this with a hypothetical $40 preferred share with a 10% yield, which would produce $4 in annual dividend income. The specific features of preferred stock vary by investment.

Private Stock

Private stock is not offered to the general public through the public stock market. Ownership is limited to a smaller group of investors, which may include employees or other private investors.

How Do You Buy & Sell Stocks?

A brokerage account is one common way to buy and sell stocks. You can deposit money into the account and choose investments yourself or, depending on the account and service, work with a licensed investment professional.

Account requirements vary. Some brokerage services may have low or no opening minimums, while specialized brokerage relationships can require substantial assets. Before opening an account, review its fees, minimums, services and investment choices.

Investment apps can also make it easier to begin investing with relatively small amounts of money. Convenience does not remove investment risk. Some apps use game-like features that can encourage frequent or riskier trading, so it is important to research the provider, understand how the platform works and consider carefully what personal information you share.

If you want to explore how time, contributions and an assumed rate of return can affect potential growth, the Investment Calculator can help you model different scenarios.

How Stocks Can Fit Into Retirement Planning

Investing is one part of building long-term financial health. Retirement accounts such as 401(k)s and IRAs commonly offer investments that may include exposure to the stock market, giving investors a way to pursue long-term growth while saving for retirement.

Your retirement plan may offer several investment choices, each with its own level of risk and potential return. Understanding 401(k) Investment Options can help you learn more about the choices that may be available through an employer-sponsored plan. Individual Retirement Accounts can provide another way to save and invest for retirement.

The right approach depends on your goals, time horizon, financial situation and comfort with risk. Before making investment decisions, take time to understand the options available to you and how they work together within your overall financial plan.

Key Takeaway

You do not need to understand every market term before you begin learning about investing. Start with the basics: know what a stock represents, understand how common and preferred stocks differ, learn how brokerage accounts work and recognize that investment values can rise or fall. Building that foundation can help you ask better questions and make more informed decisions as you plan for the future.