Investing in the stock market can look as difficult as rocket science in Greek. With numbers and names flying around, terms you don’t understand, horror stories of people who were unsuccessful, this can be understandable. But this is not necessarily the case. Here are some stock tips for the beginning investors which can help make the process simple, and with a little understanding and study, you can be on your way to being a successful investor within no time.
1. What is investing in the stock market? What terms and definitions are there?
Purchasing stock means that you are buying a small portion of the company. Depending on the type of stock you purchase, you may also have voting rights and can attend company meetings. There are two types of market movements; Bear-ish and Bull-ish. A bear market is where the prices are dropping. A bull market is where the prices are rising. There are lots of stock-specific trading terms, and it would behoove you to study up on these. The alphabets on each stock represent the name of the company; MCD is McDonald’s, BAC is Bank of America Corp., etc.
2. How Does the Stock Market Work?
The stock market operates on the basic principle of supply and demand. The amount of shares makes up supply, and then the amount of shares that the investors want to purchase makes up the demand. Keep in mind that every share sold has someone at the other end who is doing the selling, getting rid of shares. People go to the stock market simply to buy and sell shares from their portfolios. The big players for the stock market are exchanges.
The exchanges are how a seller is matched with a buyer, the trading is facilitated and the share price is set. The main exchanges are the famous New York Stock Exchange (or the NYSE) the Nasdaq and electronic communication networks (ECNs). There are also some regional exchanges such as the Pacific Stock Exchange and the American Stock Exchange. It used to be a while back that all trading was done over a traditional exchange such as the NYSE or the smaller regional exchanges, but now many trades are done through the Nasdaq, that uses ECNs, and the many different firms that have access to the Nasdaq and therefore can help facilitate investor trading.
Stocks have two different kinds of valuations. One valuation is created with some kind of cash flow, fundamental earnings analysis, or sales. The other valuation is determined by how much that an investor may be willing and able to pay for a certain share of stock and how much the other investors will sell them for, the basic supply and demand principle again. Both valuations regularly change over time because the investors will inevitably change the methods they use to analyze stocks and will also change how confident they are in the stock market depending upon the economy. We can discuss both valuations further.
The main concept is risk and return. You risk your money more with the stock market as opposed to if you are simply to leave it in a CD or in a savings account, but the return from the stock market is greater because of the risk you take. Fluctuations in the stock market may lead to both huge losses and huge gains, but if you wait it out over time, these will seem like smaller fluctuations in the long run and you will still see good returns. Generally, the long term return for investing is an average of 10 to 12%, much higher than savings or CDs with a rate of 4 to 6%, about half.
It can be very tempting to attempt to time the market, but this is not possible. Page after page after page has been written by experts and researchers on this topic, and not a single one has found a solid, legitimate way to find or predict stock market trends.
Instead, try cost averaging. Purchase stocks on a regular basis from time to time, such as every other pay period or even once each year. That way you will always purchase at the average price. Trying to time the market could leave you purchasing at low or high valuations.
3. Easy Ways To Invest
Many people are choosing the comfort of their home or office to make their investments on through the internet. Here are a few tips for online investing.
- Online trading isn’t instant. Even though bank transfers can be conducted within seconds; your purchase still needs to go through a broker (person or team of people who do the actual buying and selling). At this time; prices may change.
- There are several ‘markets’ through which your broker can choose to make the purchase or sale. The broker will pick the one that is best for the majority of investors, such as the NYSE (New York Stock Exchange), or through a third party, or even through the company itself. Some websites offer the option to direct specifically which exchange to go through, although this may cost extra.
- A helpful stock market tip may be to place ‘limit orders’ rather than market orders. Limit orders are directions to buy and sell at a certain price. This can ensure that purchases are made effectively despite market changes, which can change drastically from second to second.
4. Day Traders and Horror Stories
You probably remember the dismal black and white pictures of the Great Depression from your history book and still, feel the effects of the recent 2020 Coronavirus crash. You may have heard of the term day trader, and wonder what it means.
Day traders are traders who buy and sell immediately, buying at the latest buzz, and selling at the first panic. This method is typically employed by amateurs, get-rich-quick hopefuls, and was, according to some experts, one of the reasons for the Crash of ’08. Day Trading is not illegal, or unethical, however, it is risky. If you are planning to make serious and solid money, selling immediately is not the key. Experts advise to hold on to your stocks for long term dividends. What this amounts to is taking an active interest in the welfare of the company whose stock you hold. Over longer periods of time, this can mean higher gains both for you and the company.
5. Portfolios & Which Stocks to Invest?
A portfolio consists of all the stocks that you currently hold and have invested in. Finding the best stocks to invest in depends on recent market trends and other factors. Some good businesses to look into including Tesla, the Bank of America, Alphabet, Facebook, and Amazon. These are large businesses that provide good returns and are relatively stable or growing companies.
Remember to spread your investments. This is one of the major keys to successful investing. Create a diverse portfolio with both low-risk investments as well as a few moderate or high-risk investments which will give you a better chance at minimizing your losses in case of an unexpected twist.
6. Other investments
Low-risk investments are usually along the lines of Mutual funds and Government bonds. These take time to ‘mature’ (become bankable), however, they are not very risky and can provide a safe retirement fund. Other investing includes trading in raw commodities, such as Tobacco, spices, and other raw materials. Investing in Cryptocurrencies like Bitcoin has been very popular, and is recommended by several experts as either a separate investment; or as something solid to go hand in hand with your other investments.
7. Scams and Legal Issues
There are several sites and online entities that copy certificates, have fake verification phone numbers in an effort to scam individuals and groups. Here are some ways to avoid a potential rip off from happening to you. There are several websites that can be used to verify registered traders; such as Iosco for Canadian and Mexican regulators and Nasaa for the US. You can also take further steps to verify the authenticity of the site, including your State Security Regulatory. Similar to the mails sent out about winning thousands of dollars in lotteries, it is safe to assume that if the offer sounds too good to be real, it sadly usually is.
In summary, Investing in the stock market can be a great way to make some extra income, and is now being offered from the comfort of home. Remember that sales are not always instantaneous when conducted online; always check to make sure that any canceled orders have indeed been canceled. Do research about the stock you are buying, and take an active interest in the stock; buy and sell responsibly. Be sure to also investigate the website you are enrolling with, and review all policies relevant. Investing doesn’t mean an overnight fortune, but with appropriate planning, smart research, and the resources of a good online research team; you can find that investing in stocks can be a great source of extra money or even your primary source of income.