So, what does my widget factory have to do with investing in the stock market? Well, in essence, all the stock market is is a bunch of pieces of widget factories being bought and sold. Companies issue stock when they want to raise money (capital), whether to start up or to expand. Once they have issued the stock and sold it, the company doesn’t make any money from stock trading.

Once the initial person has bought a share of stock, he/she can sell it to whomever he/she wants, for whatever price the market will bear. The stock market is pure supply and demand. If I have it, and you want it badly enough, you will pay what I am asking. If I have stock and want to have cash, I need to sell, and if I need to sell really badly, then I may have to lower the price to get you to buy.

Stocks are shares of a company. If the company makes a profit, management and/or the board of directors may choose to use that profit to expand the business, or they may declare a dividend, money to be paid per share. The size of the usual dividend is one factor people look at when deciding to buy a particular stock.

The price of a particular stock goes up and down for many reasons. One is the underlying value of the company. Is the company profitable today? Will there be a need for its products tomorrow? Is it well run? Does it owe a lot of money?

Another factor is the market in general. Because of various factors in the economy and the market as a whole, stocks in general tend to move either up (Bull Market) or down. This doesn’t mean that your stock will necessarily move in the same direction as the market, but the odds are it will.

Stock brokers perform the function of putting buyers and sellers together. The stock exchanges are the places where trades are made. I tell my broker I want to sell 100 shares of XYZ. You tell your broker you want to buy 100 shares of XYZ. At the stock exchange, my broker (actually his firm’s representative) offers the shares for sale, and those who want to buy bid on them. Someone submits a low bid, someone else tops it, or maybe not. A price is agreed upon and the transaction made.

There are two ways you can make money in the stock market. You can receive dividends from your stocks. If you buy a stock for $10.00 per share, and it pays a yearly dividend of $.50, that’s like 5% interest. You also make money if the price of the stock goes up between the time you buy it and the time you sell it. If you sell that $10.00 stock for $12.00 a year later, you have a $2.00 capital gain, which, when added to the $.50 dividend, gives you a total return of $2.50,  or 25%. Of course if you could only get $8.00 when you try to sell, you lose money.

So, how do I invest in the stock market? In general, you can do so by buying individual stocks or by buying mutual funds. I’ll talk more about mutual funds in another post. If you want to buy individual shares of stock, you need to decide what company to buy. You can do this on your own or with the help of a stock broker. You should learn about the company and about how much the stock has sold for long and short term. You then place a buy order. The broker buys it, charges you a commission, and then you own it. There are basically 3 types of brokers.  Full service brokers work for firms like American Express. They follow the market and advise their clients on which stocks to buy and sell, and when. For this service, they charge a higher commission than the others. Discount brokers like Schwab have offices and may offer literature, but they are basically order takers. Less service, lower price. Deep discount on-line brokers operate on the internet and are just order takers too. They are cheap, but it may take a while for your orders to be executed. In general, the idea is to pay only for the services you need. If you pick the stock, you don’t need a full-service broker to buy it for you, but if you want someone to help you manage your assets, a full-service broker may be worth the cost.

Another way to buy stock is through a DRIP, a dividend reinvestment plan. A lot of stock today is owned by mutual funds or other institutional investors who are more interested in short term profits rather than the long term well-being of the company. To combat this, companies institute DRIPS . Once you own stock in a stock that has a DRIP, you can sign up for the DRIP, and instead of paying you cash dividends, the company buys you shares, or partial shares, of their stock. The advantage of a DRIP for you is that you pay no commission to buy these shares, and in some cases, no commission to sell either. Some DRIPS also allow you to buy shares with cash directly from the company.

In general, over the long haul, investing in stock will give you greater returns than other investments. If you pick good stocks, there is almost no inflation risk. The chances are good that over the long haul, your investment in the stock market will grow at a rate greater than the inflation rate. However, investing in stock is fraught with investment risk,  and we’ll learn about that next time.

(This post was written by RAnn, a full-time paralegal and mom from New Orleans. She has an 18 year old son, a 15 year old daughter, and a 6 year old daughter. She blogs at This That and the Other Thing (http://rannthisthat.blogspot.com) and for her Alumnae Association (http://mfaea.blogspot.com).  Besides blogging, she enjoys reading, being a Girl Scout leader, and travel.)