by Graham Duke

Created on: May 21, 2008   Last Updated: September 11, 2008

At first, the stock market may seem complicated and difficult, but the fundamentals upon which it is created are actually very simple. Ownership in a company is divided into a number of shares which trade on a public market. The value of the company, also called market capitalization, is equal to the sum total of the values of all of the outstanding shares. Thus when the value of the company increases, the value of each share increases. When it comes time for the owners of the company to make a profit, the company pays what is called a dividend. This is, quite simply, a share of the company's wealth being distributed to the owners of the company.

When it is time to start investing, the safest approach is to start by "paper trading." Allot yourself a theoretical bankroll of play money and record stock transactions that you would make with real money. This will give you time to learn the ropes and start to build a realistic assessment of your strategies before putting them into full swing and buying actual equities.

When you are ready to start investing with real money, the first thing you'll need to do is get an account with a brokerage. Most major banks have a brokerage attached to them. There are also a number of on-line services with no commissions or low commissions. A commission is the fee that you pay to a broker to make a stock trade for you. Traditionally, there was a lot of work involved with executing a trade, so commissions were relatively high and would really cut into the bottom line of an investor with a small portfolio. In the digital era, however, transactions are handled entirely inside the electronic realm, so it's very easy to find a way to trade without paying any commissions at all.

Before buying any stock, a good sanity check is to look at the entire company and ask yourself, "if I could afford it, would I buy the whole thing?" If you wouldn't know what to do with a company or how to make it profitable, then it's probably best that you don't own any of it. In investigating a company, there are a number of metrics and technical statistics that can help you make your decisions; the one you'll want to pay attention to immediately is the P/E ratio (Price over Earnings). If a stock sells for $80 and the company makes a profit of $10/share each year, then the price over earnings is 8. Big well-established companies tend to have low P/E ratios and are often referred to as blue chip companies.

Blue chip investments are generally large market capitalization companies and are seen as relatively low risk and a good place for beginners to start. Companies which are not yet very profitable, but are growing and looking to the future may have a very high P/E ratio, but still represent a solid investment. As a beginning investor, aiming for small profits while keeping risk low is a good idea; there's always time to make more money.

Learn more about this author, Graham Duke.
Click here to send this author comments or questions.