Money in the Stock Market

• When you put your money in the bank, the bank lends the cash out to other people, but both the bank and government promise that you can take out an amount equivalent to what you put in at anytime. The stock market works differently. When a company issues shares of stock, it passes them to an investment bank, which auctions the shares off into the market. When you buy shares, a broker purchases them from any number of current shareholders -- usually not from the company itself. Your money goes to that person, who most likely turns around and buys other shares of something else, sending your money skipping around the investment world.
  
  

Shares

• When you put money into the stock market, you receive a number of shares in a company. Once upon a time, you received a certificate attesting to your ownership of those shares, but now you will most likely receive an electronic file that your broker, the company and maybe a few others keep tabs on. These shares are not the same as money. Instead, they represent a tiny piece of ownership in the company, which means a share of profits in the form of dividends if the company has extra cash after taxes and expenses, and a buyout if another company buys your company. As a result, share price reflects other investors' expectations of the company's ability to churn out future profits.
  
  

Getting Money Back

• When you buy shares of stock, you hand over money for a piece of paper or an electronic file representing ownership. You only see cash again -- meaning you only make or lose money -- once those shares are sold to someone else. If the share price goes down, you do not actually lose any money until you sell the shares for less than you bought them. If the share price goes up, you do not make any money until you sell at a profit. As a result, financial information websites such as CNN Money and The Motley Fool stress the importance of researching companies before investing to ensure that you invest in well-run companies with reasonably priced shares. As The Motley Fool points out, a $1 share is expensive if the company is headed into bankruptcy and you never see that $1 again, whereas a $50 share is cheap if the company can continue generating modest be steady profits for 30 years.
  
  

Other Investments

• You do not have to put your money into the stock market to invest; plenty of other investment opportunities exist, and some are much safer while others are much riskier. You can buy government savings bonds directly from the U.S. Treasury, which can be exchanged at any bank for cash plus interest at any time and have higher interest rates than a savings account. You can also invest in mutual funds, which pool thousands of investors' funds together to buy large amounts of stocks and bonds. Additionally, you can go to the bank and put your money into a Certificate of Deposit (CD) or a high-yield savings account, which are both guaranteed by the government, meaning you won't lose your money. Both of these investments have higher interest rates than normal savings accounts, though usually more restrictions on when you can withdraw your money.