Do You Know How The Stock Market Works?

By Jon L. Ten Haagen, CFP ®
asktheexpert@longislandergroup.com

What is the stock market?

A stock market (and there are many) is where you buy and sell and trade publicly traded stocks (securities). When you buy a share (or more) of a publicly traded stock you own a part (percentage) of the company along with the many other shareholders. When the stock rises and declines with the daily market swings your value in the company follows.

Some companies do give an added value in providing a dividend, which is a quarterly distribution of cash to your account. You can have the dividend reinvested into the stock you hold (making your share of ownership just that much bigger) or you can take the distribution and use it for whatever you want. A significant detail about the historical S&P returns is that nearly half, over 40 percent, of the gains made over the years come from dividends. Calculating in the effect of an investor reinvesting all dividends received would render the historical performance figure substantially higher (Investopedia).

Other companies do not issue dividends, but keep the money to do more internal growth.

Companies offer shares of stock periodically called an IPO (initial public offering). The company issues new stock shares to provide it with cash funds to do various programs to hopefully increase their value and grow the company.

So, why invest in the stock market? Over time, stocks as a whole tend to rise, which is why people invest.

One must choose quality companies with substantial assets backing them to hopefully succeed. Ownership takes advantage of a growing economy. Stocks are easy to buy and sell in the open market vs. some other assets, which do not have as much liquidity. This does not guarantee a profit, but you can get to your money more easily.

There are many ways to buy stocks.

You can find on line companies to work with, or an investment club (where you have to have the majority of members agree on a specific stock before you can buy it). A full service broker might help, or a money manager. You will pay more for the more services given to you.

Additionally, you can buy a fund that provides a large diversified number of stocks with one purchase.

Then there is an ETF (exchange traded fund), a marketable security that tracks an index, a commodity, bonds or a basket of assets like an index fund.

You might consider a hedge fund if you are an accredited, sophisticated investor, but I would suggest you learn as much as you can before venturing there.

There is an inherent risk in the stock market; a stock can go bankrupt (Enron, Global Crossing) and the stock price goes to zero. I would suggest talking to a seasoned professional about getting started in the market.

Diversification will help you to be in more asset classes, however this may not give you any more stability. There will be market declines and if you listen to the market news every day you will drive yourself crazy. Investing in the stock market is a long term plan. There are market corrections which are considered to be a 10-percent downturn, a 20-percent downturn in a short time period is considered to be a market crash (if the decline is over a longer period of time it can be called a bear market). Bear markets vary in their duration.

There are many stock exchanges around the world. I believe you are best to fully diversify your portfolio to take advantage of various areas of the globe. Most important is to understand what you are buying and why before you start. If you do not have the time or inclination to do it yourself, seek out an experienced investment advisor for guidance. There is far more to investing than the stock market alone, so I would suggest seeking out a certified financial planner (CFP) who can assist you with all your financial needs, such as insurance coverage, wills, beneficiary designations, and tax clarification, etc.

The very best of summers to you and please do not hesitate to give us a call if you would like to talk or have an idea for a future article idea. Thank you for your continued readership.


Huntington’s Jon L. Ten Haagen, CFP is founder and CEO of Ten Haagen Financial Services, Inc. which is an independent full-service Investment and financial planning firm. In this bi-monthly column he will answer your questions on the markets and investing. Ten Haagen has 39 years of experience as an investment professional. You can learn more about Ten Haagen Financial Services at Tenhaagen.com

Ten Haagen is an investment advisor representative offering securities and advisory services through Royal Alliance Associates, Inc., member of FINRA/SIPC, and a registered investment advisor. Ten Haagen is a certified financial planner (CFP) since 1982. The Ten Haagen offices are located at 191 New York Ave., Huntington. Please feel comfortable to call and stop by for a cup of coffee and a chat. E-mail questions to asktheexpert@longislandergroup.com

Ten Haagen is very active in the community giving back. He is on the board of a number of nonprofits and is the liaison for the Greater Huntington Council of Yacht and Boating Clubs, Inc. The boating council represents approximately 4,500 boating families helping to keep our waters safe and upgrading the water quality.