CNBC reports that over 14.6 million Americans had $1 million or more in investable assets in 2021, a substantial increase from the year prior. Crypto gains played a major role in contributing to an increase in American millionaires, alongside a soaring stock market. So how can you become a part of these gains?
Despite being one of the most common investment channels, understanding how the stock market works, determining how to make the best investment, and keeping track of the constant changes in market prices can feel daunting. Read on to learn the basics of stock investing and how to navigate the markets like a seasoned investor.
What Is The Stock Market?
The stock market is a platform of exchanges where shares of companies are bought and sold. These exchanges facilitate the transactions of publicly traded companies in a controlled, regulated environment, much like how cryptocurrency exchanges operate. In return for their services, the exchange will earn a fee from the trade participants.
Although the New York Stock Exchange (NYSE) is the most familiar, several exchanges operate in the U.S., including NASDAQ, American Stock Exchange (AMEX), and others. Many countries around the world have stock exchanges of their own.
The NYSE, located on Wall Street, has been around since 1792. However, it didn’t become a public entity until 2006. A 2007 merger with the largest European stock market, Euronext, led to the NYSE/Euronext becoming an international entity and the world’s largest stock exchange with a valuation of over $26 trillion.
What Shares Of Stock Represent
When someone purchases a share of stock, they have a part-ownership in the company. Despite their ownership, shareholders don’t always have voting rights—the ability to make decisions on company policies.
There are two main types of stock. The first is common stock, which is most common (pun intended) and allows the owners to vote on company issues and board members. Common stock shareholders are paid last in line after bondholders, creditors, and preferred shareholders in the event of a bankruptcy. Preferred stock doesn’t come with voting rights, but these shareholders typically earn valuable dividends and are prioritized over common shareholders in bankruptcy proceedings.
How Stock Exchanges Work
Stock exchanges act as marketplaces that connect buyers and sellers of securities, like stocks and bonds. These regulated entities ensure that securities are traded efficiently, orderly, and quickly. The markets can process millions of transactions every day. Exchanges either take place in person or electronically. While movies like Wall Street glamorize stock exchanges and trading, the truth is much of the trading excitement doesn’t happen on the exchange floor anymore.
Auction exchanges, like the NYSE, are physical locations where buyers and sellers can make trades with one another face-to-face. These exchanges used to be the only way to trade securities, but most exchanges today take place electronically. The NYSE is well-known as being one of the last auction exchanges in existence.
Electronic exchanges are gaining in popularity due to their transaction speed and accessibility. The NASDAQ, founded in 1971, takes claim as the oldest and one of the leading electronic exchanges in the world.
Brokerage Accounts And Why You Need Them
A brokerage account is an investment account used to buy, sell, or hold securities. Like you would deposit or withdraw money from a checking account, brokerage accounts allow you to transfer money in and out of your account and the stock market.
Stock brokerage companies like Fidelity, Vanguard, or Charles Schwab provide these accounts and facilitate transactions. You can have multiple accounts, and many come with minimal or no trading fees or account minimums.
Money made from investments is considered capital gains and is therefore taxable by the government. Brokerage accounts are also known as taxable investment accounts. However, many brokerages offer retirement accounts as well, with tax benefits depending on the type of account.
Best Brokerages For Investing
Fidelity: Fidelity features a user-friendly user interface for easy investing for beginner investors. Fidelity also offers customers access to its family of zero expense ratio index funds and a free updated retirement plan with calculators and tools.
Schwab: Schwab offers competitively low fee accounts. Its intelligent portfolio automates investing based on users' goals and is free. It offers tax-loss harvesting and automation. These features make Schwab appealing to the set-and-forget crowd.
SoFi: SoFi is another competitor in the low fee category. Its automated trading program doesn’t charge any advisory or management fees. The robo advisor feature provides helpful planning resources for real-life scenarios. SoFi also offers a crypto-trading platform, with 30 coins available for trade, including popular currencies like Bitcoin and Ethereum. For those wanting to invest for more than retirement in more ways than one, SoFi has you covered.
Check out this list of the best stock brokerage companies and investing apps.
Bottom Line
You don’t have to be a Wall Street aficionado to invest in stocks. True, stock exchanges can be complex, but nowadays, most are automatic and widely available to the average investor. Features like robo advisors and automatic investing can mitigate risk, accomplish investor goals, and take the busy research work out of investing.
Eric Rosenberg is a financial writer, speaker, and consultant based in Ventura, California. He holds an undergraduate finance degree from the University of Colorado and an MBA in finance from the University of Denver. After working as a bank manager and then nearly a decade in corporate finance and accounting, Eric left the corporate world for full-time online self-employment. His work has been featured in online publications including Business Insider, Nerdwallet, Investopedia, The Balance, HuffPo, Investor Junkie, and other fine financial blogs and publications. When away from the computer, he enjoys spending time with his wife and three children, traveling the world, and tinkering with technology. Connect with him and learn more at EricRosenberg.com.