2: The Stock Market: Owning a Piece of Companies

Stock investing isn’t a get-rich-quick scheme. Instead, it should be a rational, disciplined, and systematic process leading to long-term wealth accumulation and the attainment of your financial goals. Before investing in individual stocks, you should put your money into inexpensive index mutual funds or exchange-traded funds (ETFs) that closely follow the US economy as further discussed in Chapter 5. Why? First, if you only have a small amount of money to invest, you’ll be unable to cost-effectively buy individual stocks and still be diversified. Second, most people, especially novice investors, don’t know how to pick individual stocks.

You also need to understand what stocks are and how they work. Be aware that stock investing involves risk, including the potential loss of your initial investment. There are no guarantees except that markets fluctuate over time. No investment strategy is always right. The best you can hope for is to be right most of the time. Learning how to invest in stocks takes time and effort, but it’s worthwhile because knowledge and experience create wealth opportunities. After becoming familiar with investing basics, you should gradually improve your skills to avoid costly mistakes.