If you check the news throughout the week, chances are you'll see updates on the stock market. For noninvestors, though, the terminology can sound like another language.
Understanding the stock market begins with the basics. Here's a look at a few key investing concepts for retirees to help you get started.
What Is the Stock Market, and How Does It Work?
A stock is a share of ownership in a company. When businesses want to raise money so they can grow, expand or develop new products, they may sell shares to investors. Buying stock makes you a part owner of the company along with all the other shareholders. You are entitled to a percentage of the company's future profits and get to vote on certain company matters, such as who should be on the board of directors.
Not every business lets investors openly buy shares. For example, you can't buy stock in a local restaurant off the stock market. A company must be publicly traded, which means it's gone through the process to list its shares on a market such as the S&P 500 or the Nasdaq. The company first sells shares directly to investors when they first go public in what's known as its initial public offering, or IPO.
From there, investors who own shares can then sell them to others. The price goes up and down based on how well investors think the company will do in the future.
How Can You Start Investing?
To buy and sell stocks, you'll need to work through a broker. A broker is a third party that processes transactions between individual investors and stock market exchanges. Brokers come in several forms: They may be large financial services companies that specialize in this service, such as Fidelity and Charles Schwab, but they can also be banks, insurance companies with brokerage services or fintech companies such as Robinhood that allow you to trade through a mobile phone app.
Your broker will also give you some type of online account. You'll need to deposit cash or link your bank account before you can make purchases. Then, you can look up different companies by name to see what price their stock is currently selling for. If you like a company, you can put in an order for the number of shares you want to buy. You can also make trades by phone — however, these trades may require you to pay a fee, as opposed to making a free trade online.
There are two ways to make money from your investment and grow your retirement savings. First, the stock price could go up because the company does well. Second, the company could send you a cash payment, called a dividend payment, for your share of their profits.
How Should Retirees Approach Investing?
Finding the right retirement investment strategy for you will depend on your personal financial goals, risk tolerance and portfolio size. However, there are a few key principles that can guide your investments as a retiree.
First, remember that investing in stocks does involve risk. You are not guaranteed to make money. It's also possible to lose money if the stocks you invested in lose value. That's why you should carefully research any potential stocks before making decisions.
One way to reduce risk is through diversification. This ensures that you don't put all of your eggs in one basket. Rather than just buying one stock, consider investing in a mix of companies across different industries. That way, your portfolio won't take as big a hit if one company or sector faces bad news.
In retirement, chances are you need to spend down your savings sooner, versus someone at the start of their career. You may want to focus on safer, more established companies such as Intel or Coca-Cola. Known as blue-chip stocks, these investments are less likely to see large gains but also less likely to see large losses.
As you invest, keep your focus on the long-term view. Stock markets go up and down daily, but over years the stock market has historically delivered a solid positive return.
Where Can You Get Help Understanding the Stock Market?
If you don't want to build a portfolio yourself, you could invest through a mutual fund or exchange-traded fund. These funds are managed by a professional investor with a certain goal, such as generating income or focusing on stocks in a certain industry. Additionally, one type of these funds — known as index funds — mimics the performance of an entire market like the S&P 500.
Another option is to meet with an investment advisor or retirement financial planner. Together, you can discuss your investment goals and come up with a portfolio that helps you meet your goals for your retirement.