A Beginners Guider to the Stock Market
Investing in stocks provides a great opportunity for investors as stocks tend to regularly outperform gold, bonds, or even treasury bills. As a result, you can say that there is a lot more activity in a stock market.
There are plenty of ways to invest in stocks. For example, you have options like ETFs, mutual funds, index funds, and even individual stocks. You can also engage in investing domestically or in foreign markets.
But there are many things a beginner must first consider before investing in stocks. You have to consider your personality and the level of risk that you are willing to take on. Being sure about yourself before you engage in trading can help diminish your exposure to risk down the road.
Here are some questions you should ask yourself:
- Am I a risk-taker?
- Do I prefer taking chances or going with a “sure” thing?
- How will I react to a 40% drop in value over a short period of time?
- Am I prone to panic?
The answers to these and similar questions will help you to decide which type of equity investment is best suited to you. For example, if you decide that you’re not a risk-taker, then it’s better to invest in mutual funds. As these a diversified, it reduces your exposure to risk.
How Much Knowledge Do you Need to Start Investing?
The answer to the question depends on what kind of investment you’re going to go with. If you’re going to put your money in mutual funds, you don’t have to do too much homework as the expert fund manager will do the needful.
If you go with an index fund, there’s even less you need to do as they move up or down depending on the type of company or industry that it’s designed to track. It’s individual stocks that will eat up your free time as you need to do a lot of research to make informed decisions.
So if you’re starved for time, going with individual stocks may not be the best idea. Investing individually in the stock market also requires skill that’s developed through learning and experience. So you have to be sure that you’ll have enough time to invest.
But if you have the time to dedicate to buying and selling stocks, there are plenty of markets to invest in:
- Japan Exchange Group
- London Stock Exchange Group
- New York Stock Exchange
Diversification is Key
Like the old saying goes, don’t put all your eggs in one basket and it really hits home in this scenario. The more you spread your money out, the less risk you take on.
So it’s best to buy shares in not only different companies but also across different industries. The stock market offers plenty of options like commodities, real estate, consumer goods, and even insurance. But regardless of what you choose to invest in, make sure that you spend enough time thinking and learning about it first.
What is the Stock Market?
The stock market means the place where the shares of an organisation are sold and bought by retail traders or financial institutions. In the digital world, the process is operated electronically via major stock indices like FTSE 100, DAX and Nasdaq 100, each of them represent the performance of the group of stocks.
These stocks are trailed by the market index to emerge with the value for the index ton the basis of the market capitalisation terminology. This means that the massive movement in the price of the particular stock might flatulate the total index value on which it is listed.
What are the stocks?
Stocks are part of the equity value of the organisation. In short, they are ownership proof of the company. The organisation issues them to raise funds, and their price might continuously trend based on the company’s performance. Stocks can be listed on the stock indices publicly, or they can be only offered to private investors. The most common stocks that are traded on Dow Jones, Nasdaq 100 and S&P 500 are Google, eBay, Apple, Xerox, Boeing.
A major event in the company like some new product launch, earning report or the new CEO appointment can also fluctuate the price of the stock. Most of these points will be answered down it the article.
How are the Stocks Traded?
While approaching stocks, there is an essential difference to be made between investing and trading.
An investor can potentially earn money through stock trading by purchasing the assets via brokerage account and by holding them for the long term. During this investment term, they always look for interest and dividends, as well as the advantage of the increased value of the long term by selling them.
This strategy of buying and holding might include holding the asset for the longer-term at least four to five years. The dividends, interests and capital gains are considered as the return while calculation the term ‘total return’ of the particular invested stock.
Traders can potentially earn by speculating on the assets for the short term. The main goal of the traders is to earn money through the short term trading methods like scalping or other day trading strategies by using the technical charts.
They can monitor the performance of their stocks and decide their entry and exit strategy through online trading platforms offered by the brokers.
How to Start Stock Trading:
The most prominent and straightforward method to start stock trading is through the online brokerage account, which can be opened by the simple process and minimum deposit. Finding a suitable broker is crucial for traders.
Investors should always have the proper plan about whether to trade individual stock or mutual funds. Individual stocks are those which are stated earlier, while mutual funds are the pool the wide range of assets, with the managed funds which look to outperform the market and ETFs tracking index.
Following are the steps to start trading stocks:
- Develop Trading Goals.
- Select the Suitable Broker.
- Research about the top Organisations.
- Always Diversify the Portfolio.
- Come up with Risk Management.
ETFinance is the top online broker that offers a dedicated trading platform and research tools that are required for the successful trading portfolio. The broker is considered as the safest and reliable venture by the tons of the active traders.
When it comes to profitable stock trading, selecting the right stock is a crucial point. Therefore, traders should be more peculiar and careful in this.
How to Select the Right Stocks while Trading?
While selecting the stocks, it can be worthy for the market professionals to look for the companies with which they are already familiar. They should consider some of the factors which can help them to predict the price fluctuations of the underlying stocks.
Financial Condition of the Organisation:
How does the company’s income sheet look like? Does there is a growth in revenue and profits in recent years? What are the companies liabilities and do they match with the value of the companies underlying assets? Is it performing smoothly and efficiently?
Does the company pay the dividends? If they are distributing the dividends, whether they are increasing the dividends and how often do they pay the dividends?
Innovation Level of the company:
What are the expansion plans or new products? How is the company serving its customers? Is it well equipped and ready with the latest market trend?
Liquidity of the Stock:
Liquidity is referred to as stocks trading volume that allows a market professional to predict the entry and the exit position. Some of the high liquid stocks are Alibaba, General Electric.
Valuation and Price:
Is the stock undervalued? To know this perfectly, P/E (price to earnings ratio) can be used by dividing a company’s current price of the stock by earnings per share. The P/E of 15 is always considered as economical. However, it might be cheap due to the company’s slower growth. The fair value of the organisation can be obtained by calculating the total fixed assets on its income report, minus liabilities and depreciation.
Volatility refers to the assets with the highest potential for massive price trend. Selecting the most volatile asset might be risky, but at the same time, it can offer some outstanding opportunities.
Some Essential points that beginners should consider before trading stocks
Before starting the stock trading, every investor or traders should consider some essential points like how much capital they are willing to risk? Diversifying their portfolio, what are their goals and understanding the trading method. Below will look into brief about all these points:
What are the Trading Goals?
What are the plans for the capital? How long they want to invest? Investing or trading as per their need, such as, if someone is planning the funds for their retirement, then they should invest in stocks for the long term that can give better returns to their investment, while if someone can need the funds in short time span, then they should trade the stocks with different short term trading strategies.
How Much Capital will be Risked?
Market professional should consider how much funds are available for trading. The prominent amount can be up to 5% of the total annual income; however, it might be different with every individual. When looking to the risk, the more understanding is required of the company of the underlying stock; traders should be well prepared for the inevitable market trends.
Diversifying the Portfolio:
Diversifying the portfolio means holding/trading the stocks of different companies, through various sectors and some other assets like forex, commodities, ETFs, etc. That can protect the portfolio from any adverse event in a particular industry.
Having The Perfect Trading Strategy or Plan:
Preparing the proper trading plan is crucial for mastering stock trading. Market professional should be capable of filtering the speculation and noise, rumours and should avoid the other factors impacting their stock trading goal. Traders should also keep their emotions on the sideway while trading stocks because they can put them into the risks. Traders should have a proper understanding of the various longterm and short term trading strategies that can help them to earn an adequate amount and avoid colossal losses.
What are the Major Stock Types?
There are three main types of stocks such as dividend stocks, growth stocks and defensive stocks. Will understand them in detailed:
This means the stocks that regularly give the dividends to shareholders of the company as the investment return. This can be received quarterly by organisations, for example, if a company pays the annual dividend amount of 20 cents per share, then it will be paid 5 cents per share quarterly.
Growth stocks are bought potentially with the objective of the capital gain. Organisation reinvests the profits instead of paying the dividends, which means investors can earn only profits through capital gains. Due to this, they might be risky sometimes.
These type of stocks are those whose products and services are always in the high demand, in any economic situation. Sectors like FMCG are an example of defensive stocks. These types of stocks are considered as an ideal investment option during the rescission but not be perfect in traditional bull markets.
Stock trading can be important for retail traders, institutions, companies and economies as it allows organisations to raise capital for their growth and dilute their risks. It will enable investors or traders to gain returns to form their wealth, while economies are benefited from the international and domestic cash flows.
If traders or investors follow all steps stated above, then they can earn a good profit and can develop a healthy portfolio. Market practitioners should develop their trading strategies and plans that can help them execute stock trading efficiently. You can have a look at the different trading tips on stock trading. https://funds-money.com/best-stock-trading-tips-from-expert/.