How to Invest in Stocks
Learning how to invest in stocks doesn’t have to be complicated or intimidating. Anyone can learn how to invest in stocks with some knowledge of how stock markets work, the types of stocks there are, and the best strategies of investing in the stock market. Armed with this information, you’ll be ready to jump in the world of stock trading with both feet.
What is a Stock?
A stock is essentially a share of a company, or an unit of ownership in a company. When you buy stock, you own a part of the company you are buying stock from. Companies sell stock in order to raise money that they need for research, development, and expansion. If the company does well in business and profits, a part of the profits will go to you through annual dividends or through the sale of the stocks that you own.
What is the Stock Market?
The stock market is where stocks and bonds are bought and sold, or traded. It’s not an actual location, though many people consider Wall Street as the physical location of the stock market. In short, the stock market is the business where stock trading happens.
Another term for the stock market is the stock exchange. The biggest stock exchanges are NYSE (New York Stock Exchange), AMEX (American Stock Exchange), and NASDAQ (National Association of Securities Dealers).
On the news, they tend to talk about the Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite Index. They all are just general market averages to give the public a basic understanding of how well the economy and companies are doing. The Dow focuses on 30 large American stocks, the S&P 500 focuses on 500 large American companies, and the NASDAQ Composite includes all the stocks listed on their exchange, both American and international, which amounts to over 2,800 stocks.
When the stock market is doing really well and the stock prices are going up, it is called a bull market. When prices are going down and the economy isn’t doing so well, it’s called a bear market. The average return of the stock market is about 8 percent a year, which is a good return. However, this is the average return of the entire stock market – your stock might have a higher or lower return depending on how well the company does in a given year.
Know the Different Types of Stocks
Not all stocks are the same. Before you learn how to invest in stocks, it’s important to know what types of stocks are out there and how they all differ from each other. Generally, stocks are grouped in three different ways: by size, by style, or by sector.
When grouping stocks by size, we refer to stocks as large-cap, mid-cap, or small-cap. Large-cap stocks are sold by large companies with a market cap of over five billion. These stocks usually do well over the years and will steadily gain in value. However, they might not gain in value as fast or as much as small-cap stocks. Mid-cap stocks are sold by mid-sized companies that have a market value of between 1 to 5 billion. Small-cap stocks are sold by companies that have a market value of less than 1 billion. Although small-cap stocks give you more potential for profit, they are riskier than large-cap or mid-cap stocks. It all depends on the risks that you’re willing to take.
Stocks can be grouped by style – growth stocks and value stocks. Growth stocks are those that are expected to raise in value higher and faster than the whole stock market (higher than 8 percent return). You might remember the dot com situation in the 1990s – these stocks that plummeted were considered as growth stocks because they rose in value rapidly, but you can see that the risks of buying growth stocks can be high. Value stocks are stocks that are at lower prices than they should be, perhaps due to company problems or bad public relations. Some investors like to invest in value stocks in order to “buy low and sell high.”
Lastly, grouping stocks by sector means to separate stocks into categories depending on the industry that they’re in – e.g., technology and health care. Some industries are cyclical, which means that they do well in good economy times and badly during recessions. Others are more stable, while not as fast-growing.
Another thing to consider when buying and selling stocks is whether you want to invest in only American investments or to also invest in international stocks from other countries. Both developing countries and developed countries have stocks that you can invest in.
How to Invest in Stocks: Strategies to Use
Learning how to invest in stocks includes learning about strategies that can help you see a return on your investments. Some people might give you a strange look when you tell them you’re learning how to invest in stocks, because they consider it as a form of gambling. However, this is true only if you buy and sell stocks quickly. Sure, this method an give you rapid profits, but so can roulette. Likewise, both “games” can result in huge losses. Follow the advice of financial experts and use the following strategies when you invest in stocks.
A common low-risk strategy for investing in stocks is to buy low and sell high. You’ll see better results if you employ a lot of patience and keep a cool head during dips in the market. There are two ways to do this – by investing in a value stock and holding it on for a long time until prices rise, or investing in an established company and not selling your stocks for a long time.
Another important strategy to use when you’re learning how to invest in stocks is to diversify, diversify, and diversify. None of the different types of stocks will perform the same in a given year. They all go up and down at different times – during one year, some stocks will rise and others will fall. If you invest all of your money in only one type of stock and then they don’t do well, you lose a lot of money and it’ll be hard to recoup your losses. Instead, if you spread your investments into different types of stocks, you might lose some money on certain kinds of stocks but you’ll still see profits in other kinds. Protect your money by diversifying your portfolio and buy stocks of different categories. This is also known as balancing your portfolio. Generally, you should aim to have a stock portfolio of more than 15 stocks. Even better, make sure you have more than 7 different industries that are represented in your portfolio.
How to Invest in Stocks: Buying and Selling
Now that you know all the basics of how to invest in stocks, you’re ready to take the plunge into buying and selling stocks. There are three different ways how to invest in stocks: with a full service broker, with a discount broker, and online trading.
A full service broker, or a stockbroker, will give you individual attention and call you with tips and advice on which stocks to buy and sell. They will work with their firm’s research departments and manage your portfolio. They will do the actual buying and selling of stocks for you. All this service comes with a price tag – stockbrokers work on commissions that are based on a percentage of your stock trades. If you want this kind of attention and guidance, a stockbroker might be the right choice for you.
A discount broker, on the other hand, leaves all the research and decisions up to you. They will just buy and sell stocks when you ask them to. This results in less fees than a full service broker. Generally, discount broker will charge you a third less than a full service broker. If you prefer to do all of the research yourself and want to pay less fees, call investment houses and ask for a discount broker.
Online trading is becoming more and more popular these days because of the low fees and full control on the investor’s part. Most online trades will cost you only to , depending on your online trading account. If you’re confident that you know how to invest in stocks and you’re willing to do all the work yourself, online trading can be a convenient and money-saving approach to trading stocks.
Why You Should Invest in Stocks
Money that’s sitting in the bank is not doing you any favors. Actually, you lose money when you leave your money in a bank account, even a high-interest savings account. Inflation will catch up to your money. Now that you know how to invest in stocks and the strategies that you can use, there’s nothing stopping you from trying your hand at buying and selling stocks. With some practice and experience, along with smart decisions such as diversifying and taking the slow approach to buying and selling, soon enough you’ll be seeing profits from your investments and then your friends will be asking you to teach them how to invest in stocks.