Dear Lifehacker,
I've built a decent amount of savings over the years and I'm ready to start investing some of it. I've heard I should put some in the stock market, but all I really know is how to look up a company's symbol. How do I get started investing? What do I need to know?

Lost Exchange

Dear Lost,
You've already made a good move by asking first. While it's certainly possible (even easy) to make money investing in the stock market, it's also possible to lose really quickly if you don't know what you're doing. Before you take any action, do your research and wait until you're ready to dive in. As Warren Buffett says, investing is a no-called-strike game. That is, there's no penalty for not swinging.

Some early investors may also not want to get involved in directly investing in stocks right off the bat. You can buy shares of mutual funds or ETFs which are essentially managed pools of money wherein another company invests in a wide variety of stocks and you get a portion of the returns. We'll come back to that, but first let's go over the basics of how individual stocks work and how you get returns on your investment.

Learn Some Basic Terminology

Most people are aware of a stock's price. Investors and analysts talk about a company's price going up or down on the market in a given day. However, out of context, a stock price gives very little information about the health or value of a company. To truly understand how well a stock is doing, you need to look at a variety of factors. For that, we need some definitions.

Outstanding Shares - This refers to the total number of shares of a company held by all its investors. This number is used to calculate other key metrics like Earnings Per Share and Price to Earnings ratio.

Dividends - Once a company reaches a certain level of stability and profitability, it can choose to start paying dividends. During a growth period, profits are usually reinvested in a company so it can grow more (which also benefits investors), but once growth stabilizes, a company can choose to pay dividends to shareholders. Shareholders can then choose to reinvest those dividends to get even more shares of stock.

Earnings Per Share - This is the amount of money that a company earns per share of stock. It's calculated as a company's net income minus dividends on preferred stock divided by the average outstanding shares. So, if a company makes $50m and there are 18 million shares outstanding, then one share is worth $2.78 worth of the company's income.