How do you make money on stocks?

There are two possible ways. The first way is when a stock you own appreciates in value - that is, when people who want to buy the stock decide that a share is worth more than you paid for it. They might decide that because the company that issued the stock has earnings that are improving, for example.

If you hang onto a stock that has gone up in value, you have what's known as unrealized gains. Only when you sell the stock you can lock in your gains. Since stock prices fluctuate constantly when the market is open, you never really know how much you're going to make until you sell.

The second way is when the company that owns the stock issues dividends - a payout that companies sometimes make to shareholders.

What are dividends?

A dividend is a payout that some companies make to shareholders that reflects the company's earnings. Often paid out quarterly (every three months), dividends give stockholders a steady return, regardless of what happens to the stock price.

Typically, older, well-established companies pay dividends, while newer companies do not. Dividends are not guaranteed, so a company can stop paying them at any time.

To keep your money growing as fast as possible, it's smart to keep reinvesting your dividends rather than spending them when you receive them. The easiest way to do this is to sign up for a dividend reinvestment plan (DRIP), which will make reinvestment automatic.

What are the advantages of stocks for retirement?

Stocks historically have produced long-term gains that are bigger than those of any other asset class. Since 1926, large stocks have returned an average of 9.8% per year. What's more, they didn't lose ground during any period of 20 years or longer during that time. Those qualities make stocks much more appealing for long-term savings than, say, Treasury bonds (which have had about 5.4% average annual gains since 1926) or stashing cash under your mattress.

Stocks' return potential gives them the best chance to beat inflation over long periods. That's why they're an essential part of a good retirement portfolio.

What are the risks with stocks?

Stocks carry a much greater risk of short-term losses thanbonds or cash (the other two major asset classes). Since World War II, Wall Street has endured a dozen bear markets (defined as a sustained decline of more than 20% in the value of the Dow Jones industrial average). As a result, it's generally not a good idea to invest a big chunk of money in stocks if you'll need to spend the money within five years or so.

How do I buy a stock?

The most common way is through a broker. Brokers are paid to trade stocks and other securities on behalf of customers. (This is different than giving investment advice, though some brokers may also be registered investment advisers.) There are two kinds of brokers: full-service and discount.

Full-service brokers dispense advice and can even manage your portfolio - for a price. For example, a full-service broker may charge between 1.0% and 1.5% of the dollar amount of a stock purchase. So if you were to buy $5,000 worth of stock with a broker fee of 1.0%, you would have to pay $50 for that transaction. Some full-service brokers offer flat fees instead.

By contrast, discount brokers may do little more than complete transactions for you - at a more reasonable price. Some online discount brokers, for instance, offer trades for under $10. One type of discount broker, known as a share broker, charges a fee per share traded. Share brokers typically charge less per share for larger trades.

No matter what kind of broker you choose, read the fine print about fees. For example, sometimes there are strings attached to cheap trades, such as requirements to make a certain number of trades per month or to maintain a minimum balance.

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