As with any worthwhile undertaking, a firm grasp of the fundamentals is a necessity. This is especially true when it comes to learning how to successfully navigate the stock market. In order to become a skilled trader, there are a few key points to keep in mind.
Stocks represent security or interest, or better yet, ownership share in a company. Companies issue stock to raise money. They use this money to grow, diversify, or invest in their company to increase its value. When you purchase stock in a company, you believe the value of the company will go up, making the shares more valuable. Then, the stock can be sold for a profit.
Shareholders are those who own stock in a company. Trading is the process of buying or selling stock in a company. Buying long is when the stock value is up and selling short is when the stock value begins to go down. There various markets that make up the complete stock market. These include the New York Stock Exchange, the Dow Jones Industrial Index, Nasdaq, and others. Stocks and securities are traded within these exchanges, where the stock prices, based on supply and demand, are tracked.
Investing and choosing a brokerage
When you get ready to make a trade and purchase stock, you cannot simply go online and purchase it as you would a consumer item. Instead, you must purchase it through a broker, a licensed firm, or a person who trades (buys and sells) on your behalf. For those just starting to trade in the stock market, choosing the right broker is very important. You will be forming a relationship with someone who will serve as an advisor, guide, and mentor as you gain experience trading.
Full-service brokers handle a transaction after being given direction to do so by a client, and hopefully, after consulting with their knowledgeable, experienced broker. A deal handled in such a way is called “full-service” and transpires over a period of time. There is typically a fee for the broker to handle the transaction because of the hands-on approach. Today, most investors trade through an online brokerage account where transactions occur in seconds and the fees are minimal compared to full service. The brokerage account, which is usually with a brokerage firm or stockbroker, is the investor’s conduit to the market. It provides access to a wide variety of investments to choose from including stocks, bonds, and index funds. The three most common types of brokerage accounts are:
- The investment account, where investors can trade stocks on their own and generally manage their own investments.
- The full-service brokerage account that has an account manager, who is either a person of a lower-cost automated advisor called a “robo-advisor.”
- The retirement account that is set up solely for the accumulation of retirement savings to leverage tax laws. Retirement accounts have significant restrictions on withdrawals due to taxes and penalties, therefore it is for long-term investing.
After deciding what type of brokerage is best, you have to decide who will provide the service. You should be looking for a no minimum amount or fee to open the account. Investigate what the broker charges for the type of investments you are interested in, such as technology, manufacturing, consumer, or energy. For stock trading, you will want to find a broker that charges a low commission per trade. For mutual funds, look for a broker that does not charge a transaction fee or a commission for funds traded on the exchanges. Dr. Kathleen Sindell’s book Investing Online for Dummies, offers excellent basic information and guidance for those newly entering the stock trading area.
Learning the market
Experience is the best teacher. Over time you will learn that a bull market means investors are confident and buying, whereas a bear market means investors are more cautious and are pulling back from as much buying and selling more. Market corrections are a fact-of-life, therefore looking at things long-term is always for the best. That is an easy adage to repeat, but in fact, in a recent Harris poll, 28 percent of those surveyed stated they would pull out of the stock market in the case of a crash. Developing a sound trading strategy is key. Spending time researching and developing a knowledge base as you learn to traverse the market maze will help to form that strategy.
Build a portfolio of stocks that is diversified. Make it a basket of mutual funds, index funds, and some individual stocks. Many brokers recommend putting only 10 percent of your investments in individual stocks and the remainder into index funds. This will help protect your stock portfolio from negative market fluctuations and mitigate any loss you might endure with taking a risk with one company. Diversification is the key to sound investing as it supports both a short and long term strategy.