Understanding the Stock Market: Essential Basics for Investors

Learn the basics of the stock market and what you’ll need to consider before investing.

Bottom Line Up Front

• It's important to understand your risk tolerance and the diversification of your investment portfolio. 
• Be aware that taxes will be charged on capital gains, or profits from investments.
• There are several types of investment accounts for different purposes, such as education or retirement. 

Time to Read

2 minutes

April 3, 2022

Investing on Wall Street may seem like your ticket to Easy Street, but it’s more complicated than just buying a few shares of your favorite company’s stock. Here are some basics you should know about the stock market before getting started as a beginner:

1. What is stock investing? A share of stock represents a share of ownership of the company. If you’re a stockholder, you own part of the company. The stock market consists of individual stocks of publicly held companies that are issued, bought and sold. They’re either traded on a stock exchange or in the over-the-counter market. Shares provide companies with access to capital, and shareholders buy a slice of ownership in the company in exchange. 
2. Past performance isn’t an indicator of future performance. You’ve probably heard this disclaimer before. You can’t time the market to trade stocks. It’s impossible to predict the turns or fluctuations that the stock market will take. With dollar-cost averaging, you can attempt to minimize risk from the ups and downs of the market.* Dollar-cost averaging is an investment plan that lets you invest a set amount at regular intervals, regardless of what the market is doing. Your best investment is to buy fewer shares when stock prices are high and more shares when share prices are low. Dollar cost averaging allows you to do this.
3. Risk tolerance and financial goals are partially based on age. Conventional wisdom holds that younger people can take more risk because they have more time to ride out volatility in the market. Those nearing retirement should play it safer. Figuring out your investing goals and the asset classes you wish to invest in can help with a diversified portfolio. Choose from different stocks of large-cap companies, bonds, exchange-traded funds, index funds or mutual funds.
4. Certain types of brokerage accounts offer specific advantages. Most people who are new to investment decision-making have a specific goal in mind for their trading account, such as saving for their retirement or a child’s college fund. There are special investment accounts designed to help you reach those goals. Traditional and Roth IRAs, as well as employer-sponsored accounts like a 401(k) or thrift savings account, help you save for your retirement plan with tax advantages. A 529 college savings plan helps you save for higher education with tax advantages.  
5. When you sell stocks for a profit, you’ll need to pay capital gains tax on the earnings. Your capital gain, or profit, may be short-term or long-term. Long-term capital gains are usually taxed at a lower rate than short-term capital gains, so it often pays to hold on to your stocks for more than a year.

Navy Federal Financial Group, LLC (NFFG) is a licensed insurance agency. Non-deposit investments, brokerage and advisory products are only sold through Navy Federal Investment Services, LLC (NFIS), a member of FINRA/SIPC and an SEC-registered investment advisory firm. NFIS is a wholly owned subsidiary of NFFG. Insurance products are offered through NFFG and NFIS. These products are not NCUA/NCUSIF or otherwise federally insured, are not guaranteed or obligations of Navy Federal Credit Union (NFCU), are not offered, recommended, sanctioned or encouraged by the federal government, and may involve investment risk, including possible loss of principal. Deposit products and related services are provided by NFCU. Financial advisors are employees of NFFG, and they are employees and registered representatives of NFIS. NFIS and NFFG are affiliated companies under the common control of NFCU. Call 1-877-221-8108 for further information.

This content is intended to provide general information and should not be considered legal, tax or financial advice. It is always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.