A beginner's guide to investing in stocks.

 Investing in stocks can be an efficient way to build wealth over time. Learning how to invest wisely and with patience over a lifetime can yield returns that far outpace the most modest income. Nearly every member of the Forbes 400 wealthiest Americans made the list in 2019 because they owned a large block of shares in a public or private corporation.

It all starts with understanding how the stock market works, what your investment goals are, and if you can handle a lot or just a little bit of risk.

What Are Stocks?

Stocks are equity investments that represent legal ownership in a company. You become a part-owner of the company when you purchase shares.

Corporations issue stock to raise money, and it comes in two variations: common or preferred. Common stock entitles the stockholder to a proportionate share of a company's profits or losses, while preferred stock comes with a predetermined dividend payment.

Why Stock Prices Fluctuate?

The stock market works like an auction. Buyers and sellers can be individuals, corporations, or governments. The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

A company's performance doesn't directly influence its stock price. Investors' reactions to the performance decide how a stock price fluctuates. More people will want to own the stock if a company is performing well, consequently driving the price up. The opposite is true when a company under-performs.

Stock Market Capitalization

A stock's market capitalization (cap) is the sum of the total shares outstanding multiplied by the share price. For example, a company's market cap would be $50 million if it has 1 million outstanding shares priced at $50 each.

Market cap has more meaning than the share price because it allows you to evaluate a company in the context of similar-sized companies in its industry. A small-cap company with a capitalization of $500 million shouldn't be compared to a large-cap company worth $10 billion. Companies are generally grouped by market cap:

• Small-cap: $300 million to $2 billion
• Mid-cap: Between $2 billion and $10 billion
• Large-cap: $10 billion or more

• What Are Dividends?

  
  Dividends are quarterly payments that companies send out to their shareholders. Dividend investing refers to portfolios containing stocks that consistently issue dividend payments throughout the years. These stocks produce a reliable passive income stream that can be beneficial in retirement.

  You can't judge a stock by its dividend price alone, however. Sometimes companies will increase dividends as a way to attract investors when the underlying company is in trouble.

• How to Buy Stocks?

  You can buy stock directly using a brokerage account or one of the many available investment apps. These platforms give you the option to buy, sell, and store your purchased stocks on your home computer or smartphone. The only differences between them are mostly in fees and available resources.

  Both traditional brokerage companies like Fidelity or TD Ameritrade and newer apps like Robinhood or Webull offer zero-commission trades from time to time. That makes it a lot easier to buy stocks without the worry of commissions eating into your returns down the line.

• Choosing a Stockbroker

  There are two types of stockbrokers: full-service and discount.

  • 
    Full-service brokers tailor recommendations and charge higher fees, service charges, and commissions. Most investors are willing to pay these higher fees because of the research and resources these companies provide.
  • The majority of research responsibility falls on the investor with a discount broker. The broker just provides a platform to perform trades and customer support when needed.

  Newer investors can benefit from the resources provided by full-service brokers, while frequent traders and experienced investors who perform their own research might lean toward platforms with no commission fees.

  A money manager might also be an option. Money managers select and buy the stocks for you, and you pay them a hefty fee—usually a percentage of your total portfolio. This arrangement takes the least amount of time because you can meet with them just once or twice a year if the manager does well.

• The Bottom Line

  Learning how to invest in stocks might take a little time, but you'll be on your way to building your wealth when you get the hang of it. Read various investment websites, test out different brokers and stock-trading apps, and diversify your portfolio to hedge against risk. Keep your risk tolerance and financial goals in mind, and you'll be able to call yourself a shareholder before you know it.