How does investing work?

Question

How does investing work?
What are stocks?
What is Investing?
How does investing in stocks work?

Answer 1

There are lots of places to look up answers to your questions, but I'll give some quick answers and tell you to read up some more on it.

Investing is providing capital to someone. For use of your capital you are often paid interest. Investing can cover a broad, broad spectrum of activities. It can be a savings account. It can be buying real estate. It can be buying stocks, bonds or mutual funds. It can be giving money to your cousin to start a gym. It can be starting your own business. All would be considered investing.

Stocks are ownership interest in a company. If a company has 1 million shares outstanding and you buy 1 share, then you would own 1/1000000th of the company. If the value of the company increases you might be able to sell your share to someone else for more money. Conversely, if the business does poorly, you might have a hard time getting someone to buy your share from you.

Some companies return part of their earnings to their investors (called dividends). Some don't.

Mutual funds are usually better for the average investor as they spread risk out among many companies. A mutual fund is a collection of money that is used to buy stocks. Many mutual funds have a goal, they invest only in the S&P 500 index companies, or only in companies that are 'green' or whatever. There is a document called the prospectus that gives the investment strategy, the current holdings and the past performance (which is no guarantee of future performance). It is necessary to read that before buying a mutual fund. It is also important to know the rules about loads (you a low or no load fund) and penalties for early withdrawal.

Read, read and read some more on these topics. Every time you read something you will learn more about it!

good luck!

Answer 2

To get higher returns, you have to accept higher risk. Don't start buying individual stocks. You are competing against investment professionals, and you will not win. Buy a maket index ETF like QQQ, which invests in an index and has very low fees. You are investing in the market as a whole. Or, buy a mutual fund, and you pay a fee (a percentage of your money) to the managers for picking your stocks. If you think that you can choose the professional that will pick stocks better than all the other professionals, then buy a mutual fund, and the increased return will be worth the increased fees. Do not fool yourself into thinking that you can pick stocks better than the pros. If there was a high-return, low-risk investment, the pros would already have jumped on it, bidding up the price until the expeected return matched the expected risk. Open a Roth IRA. Put money into it. You will not get a tax deduction now, but the money will grow tax-free, and when you take the money out, you won't pay tax on it. Your tax rate when you retire is almost certainly going to be higher than your tax rate now, so this is a good deal. (If you think your tax rate will be lower in retirement, put your money into a regular IRA, which gives you a deduction now, but the money is taxed as regular income now when you take it out at retirement.) Put the money into an index ETF like QQQ. DO NOT sell every time the market drops. You want to buy low and sell high, and selling when the market drops is the opposite of that.

Answer 3

Those questions have some very long answers...

Here's a good place for you to start.

http://www.fool.com/school/basics/basics01.htm

Or you could read the book "Investing for Dummies."

http://www.amazon.com/Investing-Dummies-4th-Eric-Tyson/dp/0764599127/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1196452703&sr=8-1