If you are into investing, you probably would have heard the term “Stocks”. In this article, we will be discussing the Stock Market and how to invest in a beginner-friendly way. In the end, I will also be showing you how you can learn to invest by using dummy money and shares on Investopedia Simulator. You might also come across a lot of terms you might not have heard before. If you do, feel free to look up or research about it from our Investing Articles and get used to it. Now let’s get right in!
WHAT ARE STOCKS?
Stocks are financial instruments that represent the ownership of the shareholder in any company. They are also called Shares, or Equity.
So if you hear someone saying they hold 1% equity in a certain company with a total of 1 Million shares. It means they own 10,000 Shares in the company (1% of a million).
Owning several stocks always means that you own a slice or a portion of the company. Meaning, that if you were to buy Stocks from a certain company, you are partially an owner.
Therefore, as the earnings and value of the company rise, so does the value of the stock you buy. If your company experiences loss, the value of your stock reduces along with it.
There are two types of stocks – preferred stocks and common stocks. Common stocks allow the shareholder to take part in the decision-making and workings within the company, whereas preferred stocks don’t.
Stocks can later be sold or bought by someone. So, you make money when you buy the stock at a low price and sell it at a higher price.
The value of stocks is kept track of by “Stock Exchanges”. Some of the well-known stock exchanges are NASDAQ and NYSE. We will delve more into this later.
Some investors try to make money by investing in the long term, say over 5-10 years. If you are one, you just sit back and let your money compound over time. These are known as Long-term Investors
Whereas the others try to buy the stocks and sell them for a good price on the same day. This is a bit of an extreme version of investing, and they are known as Day Traders
It is important to know if you are interested in Day trading or long-term investment. This is because the strategies might highly vary depending on your scope.
If you are still unsure about what stocks are, here’s an analogy. Imagine stocks as a ticket to a blockbuster movie you buy for $2 each. If the movie is good, the number of audience increases, along with the ticket price. So later when the tickets cost $3 each, you can sell yours and earn a dollar. If the movie is bad, the ticket prices would go down to say, $1 each. Now you can either sell yours and lose a dollar, or wait for the prices to go up.
WHAT IS THE STOCK MARKET?
The Stock market is a public platform that creates an environment for traders and investors to buy and sell stocks at a fair price based on a set of regulations. In addition to this, the stock market provides companies with capital to use to grow their business. Say a company issues 10 Million Shares each worth over $10, and the Stock market provides the company with 10 Million Dollars. They also help investors who buy the stock, to profit by selling at a higher price.
The Stock index keeps track of the performance of specific companies, assets, and organizations. Some of the top Stock indices include the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500.
The NYSE and NASDAQ are the largest stock exchanges in the world
| Exchange | Location | Market Cap.* |
|---|---|---|
| NYSE | U.S. | 26.11 |
| Nasdaq | U.S. | 22.42 |
| Shanghai Stock Exchange | China | 7.37 |
| Tokyo Stock Exchange | Japan | 6.0 |
| Shenzhen Stock Exchange | China | 5.33 |
| Hong Kong Stock Exchange | Hong Kong | 4.97 |
| London Stock Exchange | U.K. | 3.57 |
| India National Stock Exchange | India | 3.45 |
| Toronto Stock Exchange | Canada | 3.41 |
| Saudi Stock Exchange (Tadawul) | Saudi Arabia | 3.20 |
| Bombay Stock Exchange | India | 2.22 |
| Copenhagen Stock Exchange | Denmark | 2.18 |
| Frankfurt Stock Exchange | Germany | 2.17 |
| SIX Swiss Exchange | Switzerland | 2.13 |
| South Korea Stock Exchange | South Korea | 2.12 |
| Euronext Paris Exchange | France | 2.09 |
| Australia Securities Exchange | Australia | 1.99 |
| Taiwan Stock Exchange | Taiwan | 1.92 |
| Johannesburg Stock Exchange | South Africa | 1.33 |
| Tehran Stock Exchange | Iran | 1.28 |
There are other trading securities such as the OTC (Over-the-Counter). This works more like broker-dealer trading in contrast to centralized trading in Stock Exchanges. Moreover, companies do not need to meet any requirements to trade on OTC, unlike in Stock Exchanges, although there are regulations to be adhered to. It is usually not recommended to invest through OTC, since there may be companies that are not very well established. When companies don’t meet the requirements for trading in stock exchanges, they trade their securities on OTC.
HOW TO BUY STOCKS?
There are certain things you would have to know about buying stocks before you start investing. You cannot buy stocks directly without knowing the plans that exist. So let’s explore them one by one.
- Direct Stock Purchase Plan (DSPP): Using this plan, investors can buy stocks directly from the company without the need for a broker. Since there is no need for a middleman, you can save yourself from losing money on commissions. However, stocks bought through DSPP require a new portfolio for every company you buy your stocks from. Due to this, it’s hard to maintain a single common portfolio for your investment. Moreover, most companies only offer this plan to their employees in the company or existing shareholders. Some of the companies that offer this plan are Walmart, Starbucks, Coca-Cola, and more.
- Dividend Reinvestment Plan: These plans allow you to buy more stocks from the company you already hold shares in by signing an agreement before doing so. Depending on the company or brokerage firm, you may or may not be charged a fee.
- Full-Service Broker: Full-service brokers are licensed broker firms that provide all necessary services for the client when it comes to investing. These are people who tend to spend their time understanding the needs and status of the client before coming up with financial advice, tips, and strategies for managing money. They help the client with retirement plans, stock market investments, estate planning, taxes, and so on. Since they take up huge commissions and are extremely pricey, this plan is only ideal if you don’t have time to stay updated on the complicated subject.
- Discount Broker: Unlike full-service brokers, discount brokers only carry out orders from their clients. And since they don’t offer any extra services and consultation, their services tend to be much cheaper, with cheaper commissions. Many discount brokers can be found online, some even offer no-commission services for certain securities. This is ideal if you are looking to just execute the trades without any extra services and advice.
HOW TO MAKE MONEY THROUGH STOCK MARKET?
There are many ways to earn money through stocks, and one such strategy is known as “Buy and Hold”. That’s right, you do your research and buy the stocks you think would grow in the next few years or decades, and you hold them for as long as possible, for years. This is a great way for investors to make money as long as they have enough time to let their portfolios grow.
To get the best out of your investment, it is recommended to put in some time just for research. Just to find the companies you think would do well in the long term.
During the boom of the internet, tech companies grew exponentially, skyrocketing their stocks. It was around this time financial advisors preached the “Buy and Hold” method, and how well it works. Unfortunately, most of people ended up buying their stocks from tech companies when it was at its peak, and ended up losing their money right after the burst of the dot-com bubble.
Despite all this, the “Buy and Hold” strategy promises great returns when invested in less volatile companies, and it’s always been a great way to grow your portfolio over the years.
BULL MARKETS AND BEAR MARKETS
“Bear Market” and “Bull Market” are popular terms in investing that are used often to describe how the market has been doing. When the prices of the stocks fall, it is called the bear market, and when the prices of the stocks rise, it is called the bull market. These terms come from the way the animals tend to attack. Bulls’ upward thrusting of horns represents the market’s rise in value, and similarly, bears’ downward swipe of paws represents the market’s fall.
It is also found that a bull market tends to last longer than a bear market partly due to the overall upward trend in the stock market over time. During bear markets, investors tend to sell their shares in order to prevent further losses, and the opposite during bull markets.
The two animals are extremely powerful, symbolizing how they can have a great effect on the overall stock market or your portfolio. To sum up, it’s a way to describe the ups and downs in the market.
BEST PRACTICES IN INVESTING IN STOCK MARKET
Before you decide where to bet your money, there are a few best practices you need to be aware of to maximize your profits and avoid losing a lot of money if it comes to it.
- The early bird catches the worm: It’s always best to start early when it comes to investing in the stock market. The stock market’s value has been increasing over the past few decades, so the earlier you invest, the cheaper the prices are going to be, and the more money you make. In addition to that, compounding over time can be profitable, and the compounding effects directly depend on the time you spend holding onto your shares.
- Invest in companies you understand: One of the best practices involves understanding the business model of the company you are about to invest in. Without any idea about the company, you are placing your bets on something unknown, and this could lead to unexpected losses. Take your time in researching about the market and the companies you are interested in.
- Don’t put all your eggs in one basket: Diversify your portfolio in such a way that you always have a hedge in your investments. “We don’t want two or more investments that are highly correlated and moving in the same direction,” Schulte says. “We want our investments to move in different directions, the definition of diversification”. In other words, the more the types of investments, the greater the chances of making long-term profits.
- Know your time scope: One of the many mistakes beginner investors make, is not being aware of when they would like to sell their stocks. Depending on the duration you would like to hold your stocks for, the companies you would want to invest in would change. Say you are a day trader, your goal would be to make as much profit as possible by the end of the day. But if your plan is the retire after 10 years, you might want to look into how your company would do in the next 10 years, what happens after shouldn’t bother you, what happens next month shouldn’t bother you, and your goal is to make as much money as possible by the time you retire. Knowing this information would completely change your investment plan for the better.
INVESTOPEDIA STOCK MARKET SIMULATOR
During your time learning about where and how to invest, using investopedia simulator can be a great way to practice. Investopedia simulator is an online stock simulator game where you start out with $100,000 worth of virtual money, which you can use to invest in a virtual stock market that works exactly like the real-world stock market. This is a great way for beginners to understand and learn what is going on better.
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