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According to Financial Management: Theory and Practice :
- More than 48% of U.S. households own stock directly or indirectly.
- Pension funds, insurance companies and mutual funds now own more than 58% of all stock, so most people have an indirect stake in the stock market.
 Over time, investments in stocks often provide better returns than other alternatives. Investing in the stock market, however, is risky. To minimize your risk, you need to do your homework. Carefully consider your investment objectives and the amount of risk, fees, and expenses before investing.
What is Stock?
A company that wants to raise money (capital) can do it in various ways, by borrowing from a bank, issuing bonds or issuing stock. Issuing stock allows the company to raise capital without creating debt. People who buy the company's stock are known as “shareholders,” because they actually own a share of the company.
How You Make Money in the Stock Market
- You make money if the company pays you dividends, which a re profits that a company pays to shareholders on a quarterly or annual basis. Some companies choose to reinvest their profits rather than pay dividends. This means no money to you directly, but tends to strengthen company finances and drive up stock prices.
- You also make money if your stock price rises above the original purchase price and you sell at that higher price.
Stock Market Index as a Measure of Performance
Stock market indexes provide a snapshot of how the overall market is performing at any given time.
- Dow Jones - The Dow Jones Industrial Average is an index of 30 blue-chip stocks (including some of the largest companies in the United States ).
- S&P 500 - The Standard and Poor's 500 is an index of 500 different stocks.
- NASDAQ - The NASDAQ is another stock index with more new technology stocks, which is often used as a measure of how Tech. stocks are performing.
How to Buy Stocks
You can buy stocks either through a broker or directly from the company.
- Brokers - A broker is a person who buys or sells stocks, bonds or mutual funds for you. Make sure the broker is registered with the National Association of Securities Dealer (NASD) at www.nasd.com . Traditional, full-service brokerages offer professional advice at a higher cost. Discount, on-line brokerages give minimal service at a lower cost.
- DRIPS & DIPS - Dividend Reinvestment Plans (DRIPS) and Direct Investment Plans (DIPS) allow investors to purchase stock directly from a company. These plans allow investors to invest small amounts of money at regular intervals.
Advice and Perspective on Picking Stocks
The goal in the stock market is to “buy low and sell high.” The key is to find companies that are good values. Just because a stock is cheap does not make it a good value. To help you search for a good value, here are a few clues to look for in a company's annual report:
- P/E ratio - This is the price-to-earnings ratio that measures the relationship between the current price of one share of a company's stock and the company's annual earnings per share. For example, if a company's stock price is $30 and their P/E ratio is 20, the company's earning per share is $1.50, which means that shareholders are paying $30 for every $1.50 that the company earns.
- Debt-to-equity ratio - A company's total debts owed (liabilities) divided by the total shareholder equity (total value of all the outstanding stock). Generally, the lower the debt-to-equity ratio, the stronger the company's financial position.
- Return on equity – The company's net income after taxes divided by total shareholder equity. Compared over years, this number lets you spot trends in investments.
How Mutual Funds Work
Mutual funds are another type of investment. A mutual fund is a pool of money from individual investors, companies and other organizations. A professional manager will invest the money in some combination of stocks, bonds and/or other securities. Mutual funds allow investors to diversify their investments in a more convenient manner. There are thousands of different mutual funds with many different goals and purposes.
More Information on Investing in the Stock Market
Playing the stock market can be a difficult and confusing venture. Please keep in mind the risk to your investments. To get more help, talk to your financial advisor or find one in your area. Many traditional brokerage firms offer a free consultation to discuss your investment goals.
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