Making Sense Of Stocks

You can't build serious wealth without owning shares in the market. Here's all you need to get started.

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Another tactic: when you buy a stock, prepare to hold it for the long term, say a period of five years or more. Even great companies, outfits with the savviest of managements and the most innovative of products, are bound to see results hiccup at some time or another. A good number of them figure a way to bounce back. Should you sell a firm’s stock on a whim, on one bad turn in fortune, you lose out on the chance to realize any gain during a rebound.

Or, finally, you can leave stock picking to a professional money manager and invest in a mutual fund that has a stake in company shares. If that’s your choice, we suggest you read on; even as a mutual fund investor you’ll want to know the nuances of the stock market so you can better appreciate what’s happening to your mutual fund investment.

Remember, the trick of investing in stocks is essentially this: look to take advantage of a company’s great track record, but at the same time, try to contain risks as much as possible. Painstaking research will help. And so will patience.

What exactly is the stock market? What are the exchanges? Is there any difference between the New York Stock Exchange and the Nasdaq? Should you care?

Whether you’re into investing or a casual observer of the ups and downs of the economy, you hear a lot about this mysterious thing called a market. The fact is, there is no one market. There are exchanges, where stocks are traded in much the same way old works of art are traded at an auction. There are people who come to the market ready to buy. There are those who are participating because they want to sell a commodity-in this case shares.

The market is simply a large clearinghouse where shares trade hands. An exchange is just another take on that same meeting place for buyers and sellers, a spot where orders for shares are sorted out and filled. The largest is the New York Stock Exchange (NYSE), often called the Big Board, if only because of the fact that the companies it lists are often large corporate movers and shakers. The other well-known exchange is the American Stock Exchange, or Amex. There are regional exchanges as well in cities such as Chicago, Philadelphia, Boston, and Cincinnati. Overseas, there are exchanges in most nations, including France (located in Paris), the United Kingdom (London), and Germany (Frankfurt).

You might have heard of the Nasdaq or the term “over-the-counter” or OTC. The Nasdaq is no different from the NYSE, except for the fact that it is a computer network run by the National Association of Securities Dealers where brokers can match orders to buy shares with those to sell.

What does it all mean to you? Well, in all honesty, not particularly much. When you trade in shares you’ll very likely rely on a broker to arrange your order and buy or sell your shares. That’s the same whether you

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