So you’re interested in learning about the stock market. Although very intricate, learning about the stock market is not as hard as it seems. While there is a lot more to learn, this short guide will help to get you started. So let’s get into some basics of the stock market, and how it works.
So what exactly are stocks?
In order to have an understanding of what the stock market is you have to have an understanding of what it’s built around, which are stocks. A stock also known as a share is basically a small portion of a company. So if you purchase a stock and become a shareholder, you essentially own a piece of that company. Because of this, you also have access or rights, to certain privileges pertaining to that company. A few of these include: The ability to vote on important matters or changes within the company such as liquidation and mergers. You also have the right to exchange stock, and the right to transfer ownership of your shares.
It’s also important to note that there are two types of stock, common and preferred. Common stock is a stock that is commonly used by a vast majority of investors. As a common stockholder, you can receive an annual report copy for the company you have invested in, and will also receive dividend payouts. A divided is the amount of money you will get paid out of the invested company’s profits. The amount paid in dividends depends on how much a company has gained in earnings.
Preferred stocks are a little different in that, there is a set dividend that is paid every quarter and you don’t have the right to vote on important company matters. However, as a preferred shareholder, you have a little more protection than a common shareholder. If something happens to a company where business plunges, then after bondholders preferred shareholder will get their portion of the assets. This often leaves little to nothing for common shareholders.
How money is exchanged and earned
There are two stock exchanges here in the US where stocks are bought and sold: the NASDAQ and the New York Stock Exchange. The demand for stock mainly depends on how confident investors are in the direction the market will go. If they feel positive that a company will increase profits, they will then make a bid or an offer on the price. Other factors also come into play such as what’s called a Price to Earnings Ratio and growth rates, which is how much investors expect a company’s revenue will grow. Mainly if investors see the company has lots of potentials and are beyond confident in the company’s future financial growth (after careful evaluation of course), then they will go ahead and make a bid. In the end, they receive dividends from a company’s profits.
Deciding which stocks you should invest in
It’s vital that you understand and recognize which stocks you should invest your money in. You don’t ever want to invest without taking a proper look at the company and their history. It’s important to make sure you’re at least familiar with the company so you have an idea of their services, how long they have been in business, and more importantly their trajectory. However, there are quite a few things to keep in mind when considering stocks:
Don’t get hung up on high/low costs of stock
This means to keep an open, and analytic mind when buying a stock. A stock that’s cheap now doesn’t necessarily mean it will have success later on. A cheap stock could potentially mean that particular company is actually losing its momentum and business is at a low. The same goes for a stock that is expensive. It could be well worth the risk to place a bid on an expensive stock, as it could have tremendous success and growth in the future. All in all, just be sure to analyze the company’s’ worth and be sure you’re confident in your expectations of the company, before making any final decisions.
Review financial history
It’s very important that you have an idea of a company’s financial history before making an investment. By reviewing their financial history, you can get a good idea of the direction the company will be heading in the future. This is also ideal as you can see how consistent they have been over a period of time. Ensure to check their history, not just their most recent reports. You want to be sure there has been overall stability and continual growth.
Lookout for revenue growth and dividends
A company that is in a healthy financial state, will have a steady history of increased dividends that have been paid out. Another reason to look at the financial history of a company you’re considering investing in. Dividends are important as they are the result of you making a good investment or in other words your income as an investor. You also want to pay attention to revenue growth. A company that is consistently making increased earnings over time, are companies that you should probably consider. Especially since this means they will only gain more and more value as time goes on.
Best advice for starting out
Practice first
If you’re new to the world of investing, it may be a good idea to practice before heading into the real thing. You can do so by opening up a demo or practice account with an online trading platform. Some demo accounts are live meaning they give real-time data. This helps give the feeling of a real trading experience, minus the investment of real money. This will also give you the opportunity to build your skills, as well as your confidence before stepping out onto the markets.
Consider using a broker
Learning the ropes of how to invest and trade in the stock market can most certainly be a challenge. While not impossible, it will be very difficult to soak up all of the information you learn and try to make sense of it all on your own. However, an experienced broker will help show you the way. They can help you to learn the ropes, come up with a concrete plan, and can also assist you in setting up accounts.
Get started sooner than later
The sooner you get started, the better. Especially if your goal is to invest for the long-term. Time is certainly of the essence when wanting to grow your funds as an investor. While it may take time to build your skills the sooner you start, the closer you will be to your financial goals. By starting as early as possible, you won’t have to worry about investing as much as time goes on if done the right way. Because the more your money increases over time, the less you will need to put aside since you will be closer to your goal.
Invest for the long-term
Usually, the end goal for most people who invest in long-term financial security. If done the right way, you can absolutely have security and even continue to build for years on end. Even if you’re investing short-term, it’s always best to keep the future in mind. You want to be set no matter what happens, and you want to be able to have more than enough financial security that will help keep the rainy days away. By investing in an IRA or Roth IRA account, you won’t have to worry about your employer being involved. With an IRA account, you can enjoy tax incentives while ultimately saving up money.
Although it will take work, becoming wealthy is very much possible. Investing in stocks is a very promising and lucrative way to reach your financial goals. As long as you stay consistent and continue to build upon your skills, the sky will always be the limit.
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