Stock investing can be a smart way to create long-term wealth, but it can also be intimidating for beginners. Whether you’re starting from scratch or looking to diversify your investments, it’s important to have a solid understanding of the basics before you dive into the world of stocks. In this article, we’ll cover the fundamentals of investing in stocks and help you understand the process so that you can make informed decisions and build your portfolio with confidence in your investment decisions.
Why Should I Invest in Stocks?
The main reason people decide to invest in the stock market is to improve their financial standing. Investing small amounts of money that provide big returns gives you freedom of choice when it comes to your financial decisions, current lifestyle and future plans.
Thankfully, there has never been a better time than now to begin investing. Information is readily available online to help you conduct your research when choosing stocks. Plus, you can check on your portfolio and make trades with greater convenience using one of many available apps for your mobile device.
How Do I Start Investing?
When you first start out in the stock market, the sheer amount of information you need to know can seem overwhelming. Fortunately, you can quickly make sense of the process by following these steps to invest in stocks.
Top Brokerage Firms
The top stock brokerage firms in the United States include Fidelity Investments, Charles Schwab, TD Ameritrade, E*TRADE Financial, and Interactive Brokers. These firms offer a variety of services such as investment advice, access to research tools, trading platforms, and custodian services. Fees and customer service are also important factors that customers should consider when selecting a brokerage account with one of these companies.
Pick Your Preferred Method
You can invest in stocks on your own or choose to work with a broker. If you are new to the stock market, a broker can help you understand what to expect and guide you to make good decisions with a new investment account. This is a great option for the short-term, but if you find yourself getting really into stock-trading it might make sense to move your stock portfolio into a self-managed account with a company like Vanguard.
Learn Basic Terms
The stock market is filled with new terms you must familiarize yourself with to fully understand how to navigate the market and manage your portfolio successfully. A few of the most critical are:
- Ask: The buying price the seller will accept.
- Bid: The purchase price the buyer is willing to pay.
- Spread: The range between the lowest ask and highest bid.
- Stop order: When a stock reaches the indicated price to fulfill a market order.
- Stop-limit order: The trade becomes a limit order once the stop price is reached.
Research and Choose Your Stocks
There is a huge amount of information and data available on stocks. The best strategy to apply when beginning to research potential stock investments is to choose companies that appeal to you. Learn about the business to discover if there are adequate reasons that compel you to become a part owner by purchasing shares. Read the annual shareholder letter and company reports. Take time to peruse quarterly earnings and take advantage of the tools and information on your broker’s website to get a deeper understanding of the company and if it is a good choice.
When you find a company you believe to be a worthy investment, decide how many shares to purchase. There is no set number. You may want to start small until you get the hang of the ups and downs of the stock market and feel more confident in your decisions. Purchasing just a few shares, in the beginning, gives you a chance to learn without taking a significant financial risk. If you find a type of stock you really like, keep an eye on the stock price
Understand the Difference Between Order Types
There are two types of orders to consider—market orders and limit orders.
Market Orders
Market orders are bought and sold at the current market price. This price fluctuates throughout the day, changing in as little as a few seconds. Most investors choose market orders for stocks that have a steady price.
Limit Orders
Limit orders are bought and sold when the stock reaches a value you determine. You instruct your broker to hold off on completing a transaction until the stock drops to a price that makes you want to purchase shares or rises to a price that makes selling a sound decision. These types of orders are typically used during brief, volatile times or for small stocks that experience wide spreads. Further control your investments by placing one of these limits:
- AON: All or none orders take effect only when all your preferred terms are met regarding the number of shares you want to purchase and the price.
- GTC: Good till canceled orders stay in effect until they expire within 60 to 120 days, or you cancel the order yourself.
- GFD: Good for day orders expire once the current trading day ends, whether the order was completed or not.
Another thing to remember about limit orders is they are completed on a first-come, first-served basis, and only after market orders are completed. They also frequently have higher transaction costs and commissions.
Make Your Purchase and Manage Your Portfolio
Once you have established which stocks you want to buy, how many shares you want and the terms of your trade, you are ready to make a purchase. However, your involvement doesn’t stop there. Consistent attention is required to properly manage your portfolio, like any investment there will be fluctuations. Review the current market activity by visiting a stock exchange to stay informed on your investment strategy.
The Terminology
Here are a few common terms that will get thrown around a lot in the stock world to familiarize yourself before your start investing in buying stocks.
Dividend: A portion of a company’s profits allocated to shareholders as part of their return on investment.
Earnings per share (EPS): This refers to the amount of a company’s earnings divided by its outstanding shares, and it allows investors to compare the performance of different companies.
Exchange traded fund (ETF): A type of security that tracks a basket of underlying assets, such as stocks, bonds or commodities. ETFs offer the opportunity to diversify portfolios with a single purchase. They are also generally more tax efficient than other types of securities as they are not actively managed.
Index Fund: An investment fund that seeks to track the performance of a specific benchmark or market index, such as the S&P 500. Index funds are designed to provide investors with broad market exposure without having to select individual stocks or bonds. They generally charge lower fees than actively managed funds and offer more diversification than single stock investments.
Price to Earnings Ratio (P/E): The P/E ratio measures a stock’s current market value compared to its earnings per share.
Market capitalization (market cap): An indication of how much a company is worth in the eyes of investors, based on the total number of shares multiplied by its share price.
Risk Tolerance: An individual’s willingness to take on financial risk in order to potentially earn higher returns. It is an important factor to consider when making investing decisions, as investors with a lower risk tolerance may not be comfortable with more volatile investments that could result in greater losses. Factors that influence an investor’s risk tolerance include age, income, financial goals, and their time horizon.
Robo-advisor: An automated, digital financial advisor or wealth management service that provides services such as portfolio management, investment advice, tax efficiency strategies and trading execution. Robo-advisors use algorithms to manage portfolios based on a customer’s risk tolerance, time horizon and financial goals. They enable investors to access professional-level financial advice at a much lower cost than what would be available with a traditional human advisor.
Stock index: A collection of stocks that represent a certain segment of the market. It’s used to measure overall performance, as the value of a stock index rises or falls in response to changes in the prices and values of its component stocks. Stock indices can help retailers track trends, gauge sentiment and assess the overall health of a given sector or market. Popular U.S. stock indices include the Dow Jones Industrial Average (DJIA), S&P 500, Nasdaq Composite and Russell 2000 indexes.
Smart Practices for Success in the Stock Market
It can take some time to build your confidence and become comfortable with the investment process. There are a few things to keep in mind to help you make good decisions as you learn more about the stock market.
Timing
It’s impossible to fully predict when prices will fluctuate in your favor. Instead of trying to time your trades, resolve to spend time in the market regularly to keep abreast of what is happening and learn when and how to make trades.
Diversification
Investment diversification is one of the smartest ways to manage your portfolio. Spreading out your investments across a number of different companies and types of investments lessens the chances of experiencing a debilitating financial loss. It also opens the doors to a greater number of opportunities you can take advantage of.
The stock market provides a wonderful opportunity to increase your financial holdings and give you more opportunities and freedom to reach your investment goals. While it may seem like a daunting task to get started, these tips will help you feel more confident as you find your footing in investment planning. You may also be surprised at how easy it is to navigate once you’ve spent some time investing. Start an investment portfolio today to experience the positive impact it has on your life.
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