The stock market is a network of exchanges and trading firms where your broker gets your orders filled, usually by a professional on the other side. Don’t try to out-trade them. Use a brokerage account or your 401(k) to buy a fund that owns the whole stock market, and hold it for years.
When a newscast says the market rose 1%, it usually means an index such as the S&P 500, a single number that tracks a set of stocks, rose 1% that day. The number moves as investors change their expectations for companies’ future profits.
Every move in that number comes from trades between buyers and sellers. You place an order with a broker, the company that holds your investment account. The broker sends it to an exchange such as the New York Stock Exchange or Nasdaq, or to a market maker, a firm that will buy or sell a stock at prices it posts publicly. A stock listed on one exchange can trade on another or with a market maker, so where it’s listed barely matters to you.
Whoever takes the other side of your order is usually a professional. In 2022, the Securities and Exchange Commission said brokers sent more than 90% of individual investors’ orders to trade right away to a small group of off-exchange trading firms. Those firms typically fill the orders themselves. Trying to out-trade them rarely pays. When economists Brad Barber and Terrance Odean studied 66,465 households at one large brokerage firm from 1991 to 1996, those who traded most earned 11.4% a year, while the market returned 17.9%.
So skip the trading and own the whole market for years. Profits, interest rates, and the economy drive stock prices over the long run, while fear and greed swing them day to day. Open a brokerage account or use a 401(k), the retirement plan many employers offer. In either one, buy a total stock market index fund, which tracks an index of the entire U.S. stock market. In a 401(k) without one, pick the broadest stock index fund the plan offers.
Then set up automatic purchases of a fixed amount every payday, and leave the fund alone through the market’s drops.
Compare the best online brokers for beginners to choose where to open the account.
Editorial & Advertiser Disclosure: The editorial content on this page is not provided, commissioned, reviewed, approved, or otherwise endorsed by any advertiser. Opinions expressed here are ours alone, not those of any advertiser. The offers that appear on this site are from companies that compensate us. That compensation may influence which products we cover and where and how they appear on a page – including the order in which they appear – but it does not influence our evaluations, ratings, or opinions. We do not include every company or offer available in the marketplace.
Related:
