The stock market is an elusive place for those who have never traded or invested in the past. It can also be a way to earn significant returns on your investments, so it’s something that more people want to understand. Read on to learn all about the various stock markets and how to get started in the stock trading world.
What Are Stocks?
When a company wants to raise capital, one of the ways to do so is to sell portions of the business to investors. When you purchase a share of stock in a company, you are essentially buying a share of ownership. A company can offer thousands of shares, so someone who owns a few shares of stock in a company won’t hold much weight in terms of decision-making for the business.
However, for most investors, the purpose of investing in stocks is not to make decisions for the company. Rather, it is to share in the financial successes of the business in the form of returns. There are two main ways you can make money when trading stocks.
The first is to buy shares of stock when the price is low and sell them when the value goes up. By selling the stock shares you hold at the higher value, you will make the difference in returns. The second is to choose stocks that pay dividends. A dividend is a payment made to the shareholders of a company from the revenue. Most dividends are paid quarterly. Not all stocks pay dividends, so if you want to receive these payments, make sure to look for options that offer them.
The stock market can be volatile, so investments can increase and decline quickly and unexpectedly. On a long-term basis, the average annual return for investors in the stock market is 10%, although after inflation adjustments, the average is closer to 7% or 8%. This historical return includes an average of all stocks included in the S&P 500, which is the stock market index that measures the performance of 500 of the largest companies listed on the major U.S. stock exchanges. Not every stock traded will yield that level of returns — some will be higher and some will be lower.
- Trading stocks can be a lucrative investment strategy for those who are willing to assume some risk.
- Buying stocks allows you to invest in a company and become a partial owner, thus sharing in the profits and losses of that business.
- Some stocks pay dividends, while others provide returns when they go up in value.
- To start trading stocks, you need to set up an account with a brokerage firm and determine where you want to invest.
- You also need to determine how much risk you are willing to take on when investing.
- Building a well-rounded investment portfolio often involves purchasing stocks from various companies across different industries.
How Do I Start Trading Stocks?
To get started in the stock market, you first need to set up an account with a brokerage firm, which will allow you to fund your investments. It’s easy to set up an account online through any of the brokerage firms that offer this service, and many have low minimum starting balances so you don’t have to invest too much to get your feet wet.
You should also establish a budget for how much you want to invest in stocks. Experts recommend setting aside no more than 10% of your entire investment budget for stocks, as doing too much more than that can expose you to high levels of volatility. Other investments are less risky, so including those along with stocks in your portfolio can mitigate some of the risk. You should also avoid investing more than you can afford to lose, so don’t use money that you need to pay for tuition, housing costs, a down payment on a house or car, or other critical expenses.
Decide What You Want to Invest In
Thousands of companies across all different industries offer stocks for shareholders to purchase. It’s up to you to decide what to include in your investment portfolio. If you have an interest in a particular industry, it may make sense for you to start there since you have some background knowledge that could prove to be beneficial. You can also invest in companies you are involved with as a consumer.
Performing research is a good way to learn more about the different industries and options available, but it can be overwhelming. The amount of information and data about investing in the stock market is quite astounding, especially for first-time investors. By keeping your objective simple, you can avoid some of the confusion and noise. Focus on companies you want to become a part owner of and research how they are doing in their industry.
Some of the key information to review includes the annual report of the company, which is a letter written by the management team to its shareholders, as well as the financial documents, earnings updates on a quarterly basis, and SEC filings. You can also consider whether the stock you plan to purchase pays dividends, which can help fund additional investments or provide a regular source of income.
After performing your research and selecting the companies whose stock you want to buy, you will need to decide how many shares to purchase. Many new investors choose to start small to get a feel for the stock trading process and gain insights into what it can be like when the value goes up or down quickly without losing sleep or feeling overly anxious.
Know the Main Markets
The U.S. has three major financial securities markets:
- New York Stock Exchange (NYSE)
- National Association of Securities Dealers Automated Quotation System (Nasdaq)
- American Stock Exchange (AMEX)
Traders can get involved in other markets, but these three are the most stable and regulated in the country. Some major cities have their own markets, while international markets are also available to U.S.-based traders. Before investing, it’s helpful to review the financial documents of a company to understand its history. If you don’t choose a company that trades on one of the major exchanges, you may not have access to the financial records.
Understanding Stock Market Terms
Now that you have a budget established and an account set up, it’s helpful to understand some of the terms that are used in the stock trading world. Two of these terms are market orders and limit orders, which you need to know when choosing how to trade.
A limit order allows you to buy or sell a stock only when it reaches or exceeds a price you have set. For example, if you establish a limit order for shares of stock in Apple at $300 per share, the order would only go through when the shares reach that price.
A market order allows you to buy or sell stock as soon as possible when it reaches the best available price. You can also set up a stop order, also called a stop-loss order, which allows you to fill an entire order for stock when it reaches a stop price that you establish.
Other terms you may hear include ask, bid, and spread. The ask of a stock share is the price that a seller is willing to accept, while the bid is the price that a buyer is willing to pay for a share of stock. The spread represents the difference between the lowest ask and the highest bid prices. As you become more familiar with the process of buying and selling stocks, these terms will become easier to understand and use. If you have questions, you can always work with an expert to learn more about trading, such as a stock market analyst at Raging Bull.
Optimizing Your Portfolio
After you invest in your first few stock shares, you can start considering your investment strategy and optimizing your portfolio. It’s important to know that the stock market is a volatile place to invest, as even a small shift in the economy in the U.S. can lead to panic, which can cause values to drop. The risk involved with this type of investing can really pay off, which is why so many people continue to trade as part of their investment strategy.
Every investor, even the most successful ones in the world, will experience rough patches. In order to come out on top, you should focus on the aspects of investing that you can control. Fluctuations in the market are outside of your control, but you can control how much you invest, what companies you invest in, and what other investments are included in your portfolio. With the right attitude and resources, you can increase your chances of success. Learn more about trading by downloading a free e-book or scheduling a one-on-one session with an expert at Raging Bull.