What You’ll Need to Know to Get Rich: Part II

Last article, I discussed purchasing stocks briefly, but I think a broad look at the basics will be helpful for everyone.

What is a “stock”? Essentially, stock is ownership in a company, and by purchasing “shares” (which are small portions of stock), one can come to own part of a company. Why is this good? Because it means that you get part of the company’s earnings. If I buy a share of stock in McDonald’s, and McDonald’s makes a bundle of money this year, then some of it comes back to me. Some companies will actually send you that part of the earnings, which is called a “dividend”. Other companies will instead use that money from the earnings to build up the company, which makes the price of a share of stock go up. If you then sell, then you make money off of the difference between what you originally paid and what it’s now worth.

How do you go about purchasing stocks? Well, if you have your budget under control, the next step is to open a “brokerage account”. This is a fancy name for an account that lets you buy stocks. Online brokerages are the way to go for new investors, and you’ve probably seen ads for a quite a few, such as Fidelity, TD Ameritrade, and E*trade. All have different incentives to join, but all are reliable.

What stocks do you buy? Just look around you. What clothes are you wearing? What computer are you using? What did you just eat? All of these things have companies associated with them who likely issue shares of stock that you can buy. Next, you can look them up on any of the finance pages that are out there (I use Google Finance), and if you think their financial info looks good, you can purchase their stock through your brokerage account. As for how to evaluate whether their financials are good, that is a topic that takes entire websites to cover. In my next article, I hope to cover my basic strategy, to give you a rudimentary idea of where to start.

Before jumping in, I’d like to quote Warren Buffett who gave the best piece of investing advice I’ve ever known: “Be greedy when others are fearful, and be fearful when others are greedy”. Before you dump a bunch of money into stocks, take a step back, let your emotions cool down, and see if people are greedy or fearful right now. The key to investing in the long term is to not let emotions overtake you.