There has been an exponential rise in the number of people interested in stock market trading in the past few decades. Stocks are now seen as financial instruments that can be used to build wealth. The image of stock trading has changed from ‘toys of rich’ to average man’s “tool for building wealth.”
Before a person starts investing in stocks it is necessary for him to possess some basic knowledge about stocks, investments, trading, how to choose a stock, different types of trading, market structure etc.
Understanding Stock Exchange
The stock exchange welcomes newcomers with open arms, however, you must take safeguards before jumping along with both ft. Stocks, bonds, mutual funds – each one of these could be lucrative causes of earnings knowing the way the buying and selling market works. These beginner tips will help you get started within the right direction for stock exchange success.
Types of Stocks and Investments
You can purchase stocks in a number of ways according to your funds, the potential risks you want to capture, as well as your goals for future years.
The 2 primary kinds of stocks on offer are: common stock and preferred stock.
Common Stock vs Preferred Stock
Common stock means getting equity inside a corporation. Preferred stock means investors have equity that resembles both common stock and bonds, having a fixed number of the face area value since it’s dividends. The costs of preferred stocks rise when rates of interest fall, and the other way around.
Stocks will also be categorized as mutual funds, cent stocks, growth stocks, value stocks, earnings stocks, and blue chip stocks.
Mutual money or mutual funds are securities which are diversified among a lot of companies to lessen risk levels. You can purchase stock in a number of companies with simply one purchase or energy production amount.
Blue Chip Stocks
Blue chip stocks are investments in well-established companies that offer more stability because of the company’s effective history.
Cent stocks are dangerous, inexpensive stocks which are traded outdoors of the major exchange, or over-the-counter.
Growth Stocks and Value Stocks
Stocks having to pay high dividends during a period of years are known as earnings stocks. Growth stocks increase as a business grows and may also yield a higher return. Value stocks are stocks that are bought while under-valued with the aspiration that they’ll grow within the lengthy term.
A bond is a kind of investment which has a maturity date, after which the investor receives a set fee of cash. You will find corporate bonds that are supported by a business, and U.S. Treasury bonds (T-bonds), that are supported by the U.S. government. Other countries like India, UK etc. also have similar types of bonds.
Foreign Exchange (FOREX)
Foreign exchange is a kind of stock buying and selling where a person invests in currencies, not companies. Currency buying and selling can establish high yielding stocks as you nation’s currency surpasses another in value, and can also be traded night or day through online sources.
How to Buy Stocks for the First Time?
Before choosing stocks, bonds, or mutual funds, find out how each works and the quantity of risk involved. Discover the fundamental concepts of the stock exchange – the best way to make money, and the best way to generate losses in line with the stock market’s patterns. Create a mentality for lengthy-term goals and success, not just short-term wealth. The stock exchange, if done right, may bring both short-term and lengthy-term financial freedom.
Use a stockbroker to purchase stocks if at all possible. They are doing charge a great deal, but could provide you with the tips you need when just beginning in the stock exchange. They may also manage your bank account for you personally, that is a huge way to save time. For those who have limited funds, there’s also discount brokers (especially online) who may not offer complete, but will help you get began. You may also invest straight into companies with DRIP plans, or direct investment plans.
How to select Stocks?
Pick your stocks carefully. Don’t place all of your hopes and dreams – and money – into one company.
Diversify neglect among several companies. Buy stocks in well-established companies so that you can manage to have a risk with a brand new company from time to time. Buy mutual funds that are less dangerous, for lengthy-term growth.
Diversifying your stock investments can help balance your portfolio and lower your risk. Also, follow stock news carefully to find out what information will steady within their earnings and which completely new companies possess the most potential. Education is applicable if you wish to be effective with stocks.
Whether purchasing stocks having to pay high dividends or mutual funds, approach the stock exchange gradually and thoroughly before choosing stocks.
Consider the stock exchange just like any other business, with potential risks and rewards. It is simple to use online sources to review the stock exchange and discover how it operates. It is advisable to enter this type of game with a healthy dose of skepticism. If there’s something you should never doubt is the need for information. If you’re planning to make a life out of this, you better be prepared to invest in good education and guidance. For more information, you can follow portals like The Stock Dork.
Important Terms in the Stock Market for Beginners
Stock trading uses specific terminologies and a beginner must have the knowledge of these terms to make understanding of the market events easy. Some of these terms are:
- All or none order — Orders that must be either completely filled or not filled at all.
- Arbitrage — Making profit out of the difference in the price at the same time of the same stock in two different markets.
- Ask/ Offer price — The minimum price at which a person is willing to sell the security. Basis point – It is a hundredth of a percentage point.
- Bear market — When the market has declined substantially over a period of time, it is called a bear market or downward trend.
- Beta — Greek letter which represents the relation between the stock price and market movements.
- Bid price — The highest price a buyer is willing to pay for a stock.
- Bull market — When the market is in upward trend or has gained substantially over a period of time, it is a bull market.
- Fundamental Analysis – A method used by investor to analyze a company’s financials as an indicator of its growth before deciding to invest in it.
- Portfolio – A collection of investments in different securities of an individual investor or an institution.
- Risk tolerance – The capability of an investor to handle declines in the portfolio.
- Spread – The difference between the bid price and the asking price of a stock.
Let’s talk about investment, investors and traders.
Types of Investors/Traders
Before you start trading, a person must clearly note down their trading plan and decide on the type of investor they want to be. He must also be clear about his risk bearing capacity and have knowledge to analyze the market conditions. It is always better to start with small amount, small quantity trades to understand the trading environment and then proceed to bigger quantities.
A person can be a long term investor or a short term trader.
Long Term Investors
Long-term investors invest with the aim of appreciating money and earning dividends. They will choose stocks that have the potential to offer long-term returns. These are the buy-and-hold types of investors who invest to finance some long-term goals.
Short Term Investors
Short term investors, on the other hand, can be further classified as:
- Position Traders — These people watch for fundamental changes in stock and hold their stocks from 5 days to 6 months. It is used by people who use stock trading to supplement their regular income.
- Swing Traders — These traders hold their stocks for more than a day but less than 5 days. They wait for sufficient price moments of the stock to claim reasonable profit. They need to spend some time on researching stocks daily.
- Day Traders — For day trading, it is important that a person has knowledge about limiting risks and maximizing profit. Traders buy and sell stocks within a short time span, sometimes even within minutes. They need to constantly monitor and analyze the market conditions and hence it is usually taken as a full time profession.
Last but not the least, set realistic goals and have patience; remember that “Rome was not built in a day”.
Some Practical Tips on Buying and Selling Shares
Buying and selling shares in the stock market sounds easy. However, that’s quite far from the truth.
When you buy or sell shares of a company, you have to be 99 percent sure of your move, if not 100 percent. It actually takes tremendous amount of attention and analysis.
Here are some practical tips you can use when you’re buying and selling shares and stocks in the stock market.
Look at the company’s sales figures.
The first thing you have to check is the company’s sales figures. More specifically, you have to check if it’s still growing. And if it is, you have to see if the growth is caused by great performance or is just linked to temporary events.
This entails scrutinizing reports and press releases regarding the company’s earnings. The goal is to know whether the company exhibited real growth or not.
Check smaller companies with sales ranging from $100 million to $1 billion since these companies can ideally have an excess of 10 percent annually. For bigger companies, the sales should at least reach 3 percent.
To finally decide if a company is indeed worthy of your capital, compare the sales growth both year-on-year and quarter-over-quarter. Spotting an upward trajectory in these comparisons will give you a go signal to buy the share of that company.
Check out the company’s earnings guidance.
A huge chunk of Wall Street companies provide the Street with their future earnings guidance. With that, check if the company has recently provided a more comprehensives or less detailed earnings guidance.
Keep your eyes on the numbers and figures. If they are higher than analysts’ expectations, they might be able to pull it off and impress market participants. if the numbers are lower than expectations, the future may be a little bit bleak.
Sometimes, earnings guidance may also reveal something about market psychology. If the company raises the guidance for the current quarter but lowers expectations, it’s probably going to sell off. But if it lowers its estimates for the quarter while at the same time increases full-year estimates, the stock can potentially take off.
Watch out for buyback programs.
There are many companies that offer repurchasing programs in the open market. What they do is they buy their stocks back instead of just offering dividends or acquire other business. Usually, this can be taken as a sign that the management thinks the stocks is undervalued.
Most of the time, you can get the scent of a buyback program through press releases.
On the flip side, the management of the business may also have other intentions for the repurchasing programs. It may be doing it because it wants to reduce the number of the share count within the public domain to achieve better financial ratios or even to boost their earnings. Ultimately, this can lead to the company being more appealing in the eyes of investors and market participants.
Other than these things, buyback programs can simply be ploys to attract more investors by making them believe that the stock will be worth higher in the near future.