How to Invest in the Share Market

Ever wonder why the rich get richer while most people’s finances seem to stagnate? Often, it’s due to an investing workhorse called compound interest. The good news is that it’s not just the rich who can take advantage of the power of compound interest. Anyone can if they start investing. And the earlier you start, the better off you’re likely to end up.

Investments with the most potential for growth are those found within the share market. Shares of corporate stock, mutual fund shares and exchange-traded funds (ETFs), for example, generally offer a high potential for investment growth over time. Here’s a powerful example: Assume you started investing $1200 per year — that’s just $100 per month — in the broad-based stock market* 40 years ago, and you’re now ready to retire. You would have put away $48,000 over that time, and your investment would have grown to a staggering $923,799.

Want to find out how you can invest in the share market and take advantage of the power of compound interest? Check out this helpful primer to learn what shares are, what types of companies issue them and how you can start buying.

Related: How to Start Investing With Less Than $500

What Are Shares?

Simply put, a share represents ownership in a company or another investment vehicle like a mutual fund. When you buy a share of corporate stock, what you’re purchasing is a small fraction of the company — or a large fraction if you have the money to buy many shares. So, if you buy a share of Apple Inc.’s stock, for example, you become a part owner of Apple Inc. Different types of shares offer unique investment possibilities, so learning the differences can help inform your investment choices.

Publicly Traded Companies

Publicly traded companies are those traded on a stock exchange, most commonly the New York Stock Exchange in the U.S. Public shares are available to anyone. You just need to contact a stockbroker and place a purchase order. The buying and selling of public shares can happen any day the stock market is open just by placing an order.

The price of a stock can change dramatically over time, sometimes even during the course a day. The fewer stocks an investor owns, the greater the risk of losing money. When investing in shares of stock, it’s recommended that an investor maintain a broadly diversified portfolio of many different stocks from many different industries. For those who don’t have the capital to buy enough stocks to properly diversify, there are mutual funds and ETFs.

Related: Investing for Beginners: The First Investment Every Beginner Should Make

Mutual Funds and ETFs

A mutual fund is a pool of investments that someone, usually a portfolio manager or mutual fund company, puts together and manages. Investors purchase shares of the overall investment pool, or mutual fund.

When you buy a mutual fund share, you’re not buying shares of the underlying investments, which include stocks and sometimes bonds. Instead, you’re buying a piece of the overall portfolio. One of the greatest advantages of a mutual fund is that, because there are so many investments within the fund, an investor can achieve greater diversification at a lower cost than he or she could by purchasing shares of stock. Like stocks, most mutual funds can be bought by anyone with the capital to do so. All mutual fund trades take place when the stock market closes, which is 4 p.m. on most weekdays.

An ETF is similar to a mutual fund in that it consists of a large pool of investments. Most ETFs track a specific market index, such as the Standard & Poor’s 500 Stock Market Index (S&P 500). As companies are added or deleted from the index, they’re also added or deleted by the ETF portfolio managers. When you buy a share of an ETF, you’re getting as close as you can to buying shares in an index, which are not available for direct investment. ETF shares are available to any investor. Unlike mutual funds but similar to stocks, shares of ETFs are traded on a stock market exchange.

Privately Owned Companies

Privately owned companies aren’t traded on the stock exchange; however, investment crowdfunding aims to connect investors with opportunities that were once only available to institutional investors. CrowdStreet, Inc., for example, links investors to residential and commercial real estate projects. FundersClub seeks funding for startups; Junction Investments, Inc. secures funds for movie productions; and Funding Circle aims to fund small business projects.

According to the Small Business Association, only about half of all new businesses survive five or more years, and only about one-third make it to 10 years or more. These numbers point to the increased risks that come with investing in privately owned companies. Specifically, if the company you chose to invest in goes out of business, your investment won’t grow. In fact, you’ll likely lose everything you invested. For that reason, investment in shares of privately owned companies should be considered only for those who have the money to lose and are typically only available to large or institutional investors with a net worth of at least $1 million and a take-home pay of at least $200,000, according to Forbes.

Related: Why Private Investments Like Non-Public Companies Are High-Risk Investments

How to Invest in Shares

Share market investing can take place in a number of venues, depending on what type of investment you’ve decided to purchase. You can enlist the services of a broker or fund manager to purchase shares.

Shares of Stock and ETFs

Shares of publicly traded stock like General Electric, Pfizer or Walt Disney can be bought through several channels, as can ETFs. If you’re looking for investment advice, you can contact a full-service broker like Edward Jones, UBS or Raymond James. If you know what you want to make a purchase and just need a service to execute the trade, a less-expensive option is to go through a discount broker like TD Ameritrade, TradeKing or E*Trade.

Mutual Fund Shares

Mutual fund shares can be purchased directly from a managing fund company like Vanguard, American Funds or Fidelity, for example. They can also be purchased through a corporate-sponsored retirement plan such as a 401(k) or 403(b). Like stocks and ETFs, mutual fund shares can be bought through a full-service broker or financial planner. The latter is less cost-effective than a direct purchase, but if you’re looking to receive financial advice, a planner might be worth the added cost.

How to Understand Market Trends

The thing about market trends is that they can’t be predicted. Remember that 40-year stock market growth number from the opening of this article? That total of $923,799 was based on the gains and losses of the S&P 500, which tracks the performance of 500 widely known, publicly traded U.S. stocks. The thing about that number, though, and all other investment performance numbers, is that what happened in the past can’t be used to accurately predict what will happen in the future. No one knows with any certainty how any capital market will perform going forward. If people did, they could avoid economic crises like stock market crashes and recessions.

Many investment professionals, however, use stock performance data trends to try to figure out how different types of stocks and shares might perform going forward. Will U.S. stocks outperform companies in Japan, Germany or the U.K., for example? Or, does a rising stock market indicate a looming market crash? If you want to track market trends and follow a particular stock’s ups and downs to make your own predictions, you can use an online stock tracking site like the ones offered by Yahoo! Finance or Bloomberg Business.

Even the experts get it wrong a lot of the time, though. “A Random Walk Down Wall Street” author Burton Malkiel famously argued that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.” Recent research from London’s Cass Business School found Makliel was right.

Understanding market trends and the movement of share prices is tricky business, even for the experts. For most investors, particularly those without millions to invest, index-tracking investments like ETFs or low-cost mutual funds are more likely to yield positive results over time with less risk.

It’s wise to know how to invest in the share market but even wiser to know how to invest while minimizing risk. The most prudent investing strategies typically include a long-term focus and a diversified portfolio.

*Stock market returns are represented by the annual rise and gain in the S&P 500, as reported by Aswath Damodaran, professor of finance, New York University Stern School of Business.

This article originally appeared on GOBankingRates.com: How to Invest in the Share Market

This article by Alaina Tweddale first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.