Investing in stocks can be a good thing. But you need to understand the stock market before you invest your valuable cash. The stock market works much like an auction. It is an auction-based market, with a stockbroker acting as an intermediary who matches buyers and sellers of stocks. The price of a stock is determined by how much he buyer is willing to pay and how little the seller is willing to sell for. The prices you see on the Internet or in your local newspaper are from the last trades of the prior day. These vehicles also tell you what the best prices are that buyers will pay for a share, as well as the best price a seller will take. The stock’s prices are constantly changing – going up and down by as little as pennies or as much as a few dollars.

The good news is common stocks have outperformed nearly all other assets. Statistics show that common stocks have an average annual return of about 14% since the end of World War II. Although there have been years when the market dropped 20% or more. These drops are hard to handle, but you must realize that the market has recovered each time and has gone on to reap even greater returns in time.

Most financial advisors will warn you that you should not invest a lot in the stock market if you need cash back in less than five years. But, investing a little is okay. An advantage of long-term investing is saving on taxes. If you hang on to your stocks, or sell at a higher price than you paid, you must pay capital gains on the profit. It you own a stock for less than a year, your short-term capital gain tax rate is the same as your federal tax bracket.