Having a grasp of the basics of the stock market is vital for anyone considering starting out in the world of stock investing. Once you have those, a strategy can begin to form, that can be based on your budget, your age, your goals, as well as what your tolerance is for risk.
For long-term investing success, diversity is key.
Those that have successful investment strategies to tend to have a lot of diversification. Never allow your money to be tied to a single investment, spread it out. Spread it out across several investments, even several sectors. This is how to have long-term, sustainable growth. Buying into a fund is one of the best ways to achieve this. It is much more preferable to do this, than to buy many securities individually.
With a mutual fund, a mutual fund manager chooses a range of different investment vehicles, with everything from real estate, to stocks included. There are many different kinds of funds, that come in many different sizes. All you do is give them your investment, and then their expert makes the important decisions. The only drawbacks of this method are that you never meet the expert, who is paid a high fee. In addition, when an adjustment is made, the broker who executes the trade gets a commission. This is included in the fund fee.
If you are a beginner to the stock market, then an index fund might be a great place to start. Like mutual funds, they have a huge range of holdings, and have much diversification. The difference is that there is no manager behind the scenes taking a huge fee. So fees are low (usually 0.4% or less).
Unlike many mutual funds (many of whom fail), they aim isn’t to beat the market, the aim is to mirror. To give an example, if you buy a fund that mirrors the Dow Jones, then when the Dow rises, your investment goes up by the same amount.
ETFs, or exchange-traded funds, are funds in the same way as the options above, but they are trading on the stock exchange, much like stocks. With mutual funds, there is often a high buy-in price, and there may be a specified time by which you have to leave your money with the fund. But with an ETF you buy your fund like you would a stock, and can buy or sell it on the market at any time during business hours.
If you are a beginner to the stock market, then trying to beat the market is going to fail. You should invest for the long term, even then you are unlikely to beat the market. But if you choose the right fund, then you may be able to mirror the market, and see your investment grow substantially over time.