Guide to Investing in the Stock Market
Investing in the stock market is of the best ways to grow your wealth. It can be a reliable passive income stream that protects your capital against inflation. In addition, many companies share a portion of their profits with investors in the form of periodic dividends. Lastly, your investments help fuel the growth of companies. Businesses can use the capital raised from shares sold to fund new ventures, projects, research, upgrade equipment, among other activities.
If you appreciate the positive impacts of stock market investing, then read on. In this article, we tell you everything you need to know about investing in the stock market.
What are Stocks?
A stock represents a proportionate ownership in the company that is selling the shares or equity. The stockholder may be entitled to the assets or earnings of the issuing company depending on the number of shares owned.
Stocks have a lot of value. They give you voting rights in shareholder meetings and in some cases, the right to receive part of the company’s profits in the form of dividends. In addition, your public equity investment can be sold through stock market trading. It’s best to sell your stocks at a higher price than what you bought them for. That way you make a profit through capital appreciation.
Many people have become significantly wealthier through stock trading. This is the reason why people buy and sell stocks on a daily basis.
What is the Stock Market?
The stock market definition is simple: it is a place or a platform where people buy and sell shares of publicly-listed companies. It is also where companies issue shares and raise capital through initial public offerings (IPOs).
To effectively make a stock market investment, there are certain rules and terms that you have to be familiar with. First, a share market doesn’t operate 24/7. You have to know the stock market hours of your preferred region or country. For instance, what time does the stock market open in New York? The New York Stock Exchange opens at 9:30 am EST and closes at 4:00 pm EST.
When the market is open, you will often see numbers running alongside stock tickers. These are stock quotes that represent the value of one share of a certain company. For example, AAPL is the ticker for Apple Inc and $182.78 is the current price of each share. That number has already changed by the time you’re reading this. That’s because stock prices move up and down every second. Price movements are due to many factors, including how many people want to buy or sell the stock, earning reports, company lawsuits, product launches, technical analysis in the charts, and many other reasons.
Finally, a common stock is the stock that most ordinary investors buy and sell on the stock market. And again, stocks give you the right to vote on company policy as well as earn dividends.
How to Invest in Stocks
You can approach stock market investing in two ways. One way is to buy and sell stocks yourself. You don’t have to be an expert to do this but you need to understand some key investing principles. Many people have grown their wealth with little background in stock trading.
The other way is to have someone manage your capital. You can do this by investing funds in financial institutions such as hedge funds and family shops. They’ll buy stocks and sell them for you for a fee. This way, you won’t need to learn how to trade stocks. Take note: they charge these fees even if the investments are not profitable.
For this reason, we’ll focus on the first approach which is the do-it-yourself method. This way, you can learn to trade stocks and understand what’s happening when you hear stock market news.
- Put Up Your Capital
Before you can invest in stocks, you must first gather the capital that you are planning to invest. There are no hard and fast rules in how much you should start with but it would be wise to only invest what you can afford to lose. Also, we suggest starting small with the intention of getting a feel for how the market works. You can always increase your capital when you’re more comfortable.
- Define Your Risk Appetite and Return Objective
Before you go on a buying spree, you must set your risk appetite and stick to it. In stock trading, risk comes in three main forms:
- Percentage loss – how much loss can you handle before you accept that your investment is not working?
- Type of stocks – are you trading blue chips only like Apple Inc. or are you willing to play with penny stocks?
- Time – how long are you willing to wait for the stock price to move in your favor?
Among the three, many retail investors (average investors) only consider the first and the second risks. However, time is also a risk factor because of opportunity cost. When your capital is tied up in a non-moving stock, you miss out on hundreds of opportunities that can grow your money.
Consider what you’re investing for as well. What financial goals do you have? Maybe you’re investing to retire early or buy your next house or save for your kid’s education. There can be many reasons why someone would want to grow their wealth. Figure out your reasons and understand what return you would need in order to achieve your financial goals by a certain time period. This may also play a role in your risk tolerance. That’s because the higher the expected return the higher the investment risk.
Consider any other investment constraints you may have, such as whether you’ll need any regular cash withdrawals and liquidity, your time horizon, tax and legal concerns, as well as any other unique circumstances.
- Open an Investment Account
When you already have the capital and you’ve defined your risk appetite, return objectives, and other constraints, you’re ready to open an investment account. This may look like an easy task but there are hundreds of brokers online that offer a wide array of investment products. Some allow you to buy stocks in the London Stock Exchange, some in the New York Stock Exchange or NYSE, and then there are some that offer access to multiple exchanges.
This can be a particularly daunting task. Nevertheless, we’re here to make it easier for you. In addition to market access, here are some of the factors that you should consider:
Some brokerages require a minimum deposit before you can create an account. For example, the account minimum for e*Trade is $500. On the other hand, Ally Invest and Merrill will let you open an account with no minimums.
Broker Reports and Insights
Many investors rely on broker reports and recommendations to guide their investment decisions. So before choosing your own broker, check their website to see what kind of materials they offer. For instance, Merrill makes it obvious to website visitors that they provide investment and retirement guidance to their clients.
Some online brokers offer financial products other than stocks. For example, you can bet on futures and options on e*Trade, while also considering to exchange-traded funds (ETFs), mutual funds, and bonds.
These are the basics that you should consider before choosing your broker.
- Deposit Funds to Your Account
After opening an investment account, the next step for an investor is to fund it. You can do this by either cutting the brokerage firm a check, depositing money to the brokerage bank account, or sending money electronically. Please keep in mind that most, if not all brokers, do not accept credit cards.
- Start Buying Stocks
Once your account is funded, you are ready to buy stocks. Before buying your first shares, take into account the board lot. This is the standardized number of shares that you can purchase for a particular stock which is defined by the stock exchange. The number is usually multiples of 100 but it can be 1,000 or 10. The purpose of this board lot is to facilitate trading by eliminating odd figures. This means that you can’t, for example, buy 17 shares of a stock when the board lot is 10, 100 or 1,000.
Since you’re just starting out, it would be best not to put all of your eggs or investments in one basket. In other words, don’t invest everything in one stock, like Alphabet (GOOGL and GOOG), the company that owns Google. We suggest you do your own due diligence and consider buying shares of the best stocks in each sector and/or industry. For example, some big names include Amazon (AMZN) in the technology sector, Northrop Grumman (NOC) in the defense industry and Netflix (NFLX) in entertainment.
This strategy will help you weather the storm in case something bad happens in a particular sector.
How to Use Basic Support and Resistance
Now that you’re better prepared to invest in the stock market, it wouldn’t hurt to know the basics of technical analysis. Technical analysis is the study of historical price action by looking at stock charts. It assumes that what happened previously is likely to happen again in the future. Let’s look at an example to illustrate this assumption.
In the chart below, notice how Tesla (TSLA) has managed to stay above $185 since May 2014. There was a brief dip in February 2016 but the stock recovered quickly. $185 is known as the support or the price area where people think that the stock is cheap and there’s potential for considerable gains.
With this knowledge, we can be confident that the stock is likely to hold $185 in the coming days. It is also possible that the stock’s price might quickly rise once it touches $185.
At the other end of the spectrum is resistance. This is the price level where the stock is expected to stop rising. Participants believe that the stock is already expensive, that’s why they start selling shares. In Tesla’s case, that number appears to be $375.
Notice how time and time again, Tesla refused to stay above this resistance level. It’s as if the price has hit a durable ceiling.
You can use support and resistance areas to help guide your trading decisions. To find the support, just draw a horizontal line where the stock price always refuses to go below. To find the resistance, draw a horizontal line where the price always refuses to go above.
Buy the support and then sell the resistance. Of course, there are other factors to consider as well when investing but that’s a topic for another time.
Yes, stock investing can be an easy way for you to generate passive income while helping the companies you invested in to succeed. Just be sure to choose the right broker for your stock marketing investing needs. You can also rely on support and resistance levels to help guide your investment decisions but don’t only rely on those. There are other factors to consider as well. As the saying goes, “the best time to invest was yesterday, the second best time is today.”