With markets nearing all-time highs and retail traders shaking things up, interest in the stock market has never been higher. Newcomers often face a steep learning curve as the stock market has a language of its own, and professional traders have many advantages to retain an edge. You don’t need to be an expert to have success in the market, however, and with our beginner’s guide to stocks, you’ll be starting on the right foot.
What is a Stock?
Simply put, a company’s stock is shares of ownership divided into equal pieces. When you buy one share of a company, you are now a fractional owner. Stocks are often referred to as equities within the financial world. Publicly traded companies issue shares to raise money for new products, research and development, or pay off debt.
Why Buy Stocks?
There are numerous reasons for investors to get involved in the stock market, but low-risk capital appreciation is the biggest draw. Don’t let the fancy finance words scare you off - this simply means that purchasing stock is a safe way to invest money and see returns without much risk of losing your entire investment. Some equities are more volatile than others, but it typically takes years for companies to fail and for entire investments to be lost.
Because traditional stock markets are less volatile than cryptocurrency or foreign exchange markets, return potential is often lower - this doesn’t mean you can’t catch lightning in a bottle, but you shouldn’t view stock investments as lottery tickets. A savvy, well-balanced approach will earn you consistent gains with little downside.
Another way investors see returns from purchasing equities is through dividends. These payments are typically distributed quarterly or annually and are basically a distribution of profits from the company among its shareholders. Not all stocks give dividends, and you’ll typically need to own a substantial amount of shares to see significant returns from these payments. Still, any return on investment is beneficial, and dividend-bearing equities are quite popular among traditional investors.
How to Invest?
Retail trading apps have made entering the markets more straightforward than ever before. You now have access to various markets, company news, and much more from your smartphone or computer. To avoid losses, it’s recommended to try and diversify your buys to multiple industries. Loading up on one sector and nothing else will expose you to market declines, so try to spread the wealth to numerous types of businesses.
Without hiring a professional financial advisor, picking which equities to buy is entirely up to the individual. If there’s a company that you believe in or a particular business you love to shop at and want to own a piece of the action, then you should buy shares in that company.
A little research can go a long way, and financial statements and company road maps are usually widely available. The two primary schools of stock analysis are fundamental and technical.
- Fundamental stock analysis focuses on a company’s financials, measuring its intrinsic value through earnings reports and debt statements.
- Technical analysis searches for trends and patterns in the market data itself, paying little attention to the bottom line.
There is no silver bullet when picking stocks, and a strong knowledge of both techniques is advised for serious traders.
Types of Trades
The easiest trade for beginners is simply buying shares of a company and holding with the expectation of the share price to rise. This is often referred to as “being long,” and you’ll have total freedom to sell some or all of your shares whenever you want. As long as the price is higher when you sell than when you bought, you’ll be making money.
The other popular trading tool for newcomers is the option. Options strategies and terminology can be incredibly nuanced and confusing, but the trade basics are quite simple. There are two types of options trades - calls and puts.
- Call options give you a choice to buy 100 shares of a company for the strike price on the expiration date. If the share price is above the strike price, you’ll make the difference back times 100 shares.
- Conversely, put options allow you to sell 100 shares at the strike price upon expiration. If the share price is below the strike price, you’re making the difference across 100 shares. Options come with risk but are a great way to maximize a limited bankroll.
With improved access and tools for retail traders, the stock market is becoming much more inclusive. Small purchases now can pay off big over time, so take this guide and get in the game today!