The beginners guide to playing the markets

By David Field

So, you've watched the classic 80s film Wall Street, and you reckon that Gordon 'Greed is Good' Gekko has got nothing on you. You've bought yourself a sharp-looking pinstripe suit and a bowler hat, and you're off to work in the city, mixing it with the hedge funds, mutual funds, stocks, shares, bonds, dividends, bull markets and bears.

The only trouble is that you don't really know what any of it means, which is probably going to hamper your investment prowess. So before you start investing your own money, let alone huge chunks of somebody else's, you need to have the stock exchange explained. Take a look at my quick guide to playing the stock markets.

First things first, a stock market isn't really a physical market - not any more. But although the whole thing is now done on computers, the principle is still largely the same. Instead of fruit and veg through, you buy and sell shares. A share in a company basically gives you ownership of a part of that company. Companies might issue millions of shares, though, so owning one share means that you only own a very small part of the company.

So how do you make money on the stock market? Put simply, you make money by buying shares in various companies and then (hopefully) selling them on to somebody else for more than you paid for them. This is possible because the cost of a share in a particular company will vary depending on how attractive people see the shares. If the company is performing badly for example, or has just fired its chief executive, the share price will fall.

The trick, then, is to buy shares that are likely to increase in price in the future. Successfully doing this involves skill, luck, experience and research. Experienced investors generally know how the market it likely to behave in the future, and will be able to pick up on the types of companies that are likely to see their share prices rise. However, there is invariably an element of luck, regardless of how experienced you are. Really good investors, therefore, account for this by mixing up their investments - diversification.

Having diverse investments means having investments in different companies, in different industries, and though different forms of investment. The idea is simply not to put all of your eggs in to one basket. For example, if you put all of your money into a company, and then the company became bankrupt, you're likely to lose it all.

Investing in company shares, by the way, is generally regarded as a relatively risky way of investing. Less risky investments include bonds - which are essentially long-term loans to companies or governments - and even property. You can diversify across these areas of investment. For example, invest some of your money in shares because the returns could be huge, but invest some in bonds because you're almost guaranteed to get at least your money back (in government bonds, anyway), even if the returns aren't as impressive.