When my brother and I were in middle school, our parents each gave us a thousand dollars to invest in the stock market. We could use the money for college. My investment choice: Hershey's, because I liked chocolate. My brother put all his in Sobe (remember those drinks?) because he liked the Lizard Lava flavor. I lost $400 by the end of it, and used the $600 to pay for a fraction of a college class (and I hope it was one that taught me sound reasoning and logic).
Although we didn't do so well in our tasty investments, my parents' little gift introduced me to the stock market, and I learned quickly that you don't always make money. There's another part of the story, though: my parents also invested for our college educations and their money doubled and tripled to pay for back-to-back tuition. Although there are foolish investments (read: my brothers' and mine), on the flip side, the stock market can be a valuable engine to grow your money if you do your research (my parents).
So how do you go about investing in the stock market?
1. First, make sure you should invest.
Do you have six months of savings? Do you have an emergency fund? Those definitely take priority over investing in the market. Work on those first and then come back. If you do have your savings in line, then let's get started.
2. Find a broker, or become your own.
Brokers are helpful, but you're paying for their services, which can be a little cheeky and a little tricky. I use E*Trade for its straightforwardness. Each trade costs $9.99 and they pride themselves in no hidden fees. I'm a fan, but you can explore other options too (Ameritrade, Scottrade, Fidelity, to name a few).
3. Pick your poison.
Ok, so it's not poison. But determine whether you want to put your money in a mutual fund, company stock, or exchange traded fund (ETF).
Let's get a quick rundown:
Mutual funds:
These are a collection of very diversified funds run by money managers. Mutual funds are the buffets of the finance world - you'll get a little shrimp cocktail mixed in with your Swedish meatballs for a "well balanced" meal, likewise, you'll get an assortment of industries and assets in a mutual fund for a "well diversified" portfolio. Also to note, mutual funds are a more expensive because you're paying someone to actively manage the fund (for better or worse...often passively managed index funds perform better than the helicopter-parentish mutual funds).
Stocks:
You're buying a chunk of the company, well more like a crumb of a company. Stocks are for the risk takers; you can win big or lose big. Spend some time researching. Lots of stock players have done the research for you, so just read some of their well-thought-out ideas. I tend to like The Motley Fool's collection of stock tips.
Exchange Traded Funds (ETFs):
ETFs are buckets of assets, also a bit like the mutual fund buffets. However, they are a cheaper, passively managed, and a more transparent version of mutual funds, with no investment minimum. These are a great option for new investors.
4. Buy!
Once you've nailed down your prospects, you buy shares. Prices run the gamut, but you'll find many from $12-$500+. Cheaper doesn't mean better, nor does more expensive stock mean you'll get more money back. That's the fun of it: it's hard to predict the stock market.
You're totally allowed to invest in a company you like. We have stock in Tesla because I think it's a cool company (did you know Tony Stark's character was inspired by the Tesla CEO? Awesome blossom). And of course, I did my research.
One more tip on buying: As a newcomer, a good practice is to consistently buy into the market for a more average price, therefore lessening your risk.
5. Sell!
Set a reasonable goal for your return (practically speaking, it'll probably be a percentage in the single digits) and sell when the timing is right. Although you might not think so now, stocks can be a bit of an emotional attachment and it's important to keep your investment relationship purely platonic. They're just cold, hard investments after all.
There you have it, the joys of the market. Don't go all in, but by investing a chunk of extra savings you'll make your money tree blossom at much higher rates with just a little help from you.
*Muchos gracias to my BIL erique. He rocks the socks off this stuff and puts up with a lot of questions from yours truly for this blob of information.