How to start investing in stocks? Simple. Master a few basic financial concepts, conduct an analysis of your investment target, choose a broker, set your goals and strategies, and start trading!
Each step requires some effort and involvement on your behalf, but the results can be very satisfying if you combine knowledge pertaining to market trends, company performance, and investment techniques.
In addition, the level of technical sophistication required in order to invest in stocks is often exaggerated. Mastery of some fundamental concepts is sufficient for starting a basic investment, which will allow you to learn and grow as you go along.
We will take a look at how to start investing in stocks one step at a time, from key definitions to specific types of orders.
Stock investment is the action by which you purchase stock in a certain company, with the intent of increasing your revenue. There are two ways in which you can make money with stocks: through trading and by cashing in dividends.
I. Trading is the most common way you can make money by investing in stock. The value of stock on the stock market varies in accordance to investor perception as to that company’s performance and potential on the market. So, the idea is to figure out which company’s stock will likely increase in value in the future, buy stock in the said company and then sell it when its market value has increased. Successfully doing this requires considerable market knowledge, a good understanding of business processes and not a small degree of intuition.
II. Dividends consist of regular payments awarded to shareholders by the issuing company, as a means of allowing the shareholder to benefit from the profit which the company is making. Dividends are usually much smaller than the value the actual shares.
There are two main types of stock: common stock and preferred stock.
Preferred Stock is considered a safer investment because its price is more stable than that of common stock. In addition, preferred stock owners also have priority when it comes to profit redistribution (dividends). In some instances, the company’s board can choose to freeze the payment of dividends if the company is not doing well and profits are low. This category of stock owners is the last to stop receiving dividends. However, if you have preferred stock you will be unable to vote at the annual shareholder’s meeting, thus making it a poor choice for those interested in contributing to the company’s decision-making process.
Common Stock, as the name indicates, is the most common type of stock freely traded on the market. It allows you to participate and vote at the annual shareholder’s meeting. Common stock usually yields higher returns when traded. However, the payment of dividends is conditioned by the company’s policy on profit distribution. As such, if the company is not doing very well, there is a chance dividend payment will stop. Nevertheless, common stock remains the most popular type of stock traded on the market.
If you’re wondering about how to start investing in stocks, you must first identify your investment target(s) – one or more companies. In our case, we are looking to buy stock which has a high chance of price appreciation in the future. So what do we need to ask ourselves at this stage?
A firm “Yes” for this one is absolutely vital. If you don’t understand the specificities of the company, you will be unable to correctly assess the reasons behind the company’s performance level on the market, and consequently, you won’t know when to buy/sell stock accordingly.
Another key factor which you should always be aware of. When companies underperform, investor confidence naturally decreases and generates a slump in stock prices. However, what you should also keep in mind is that the perception of the company’s performance is what actually triggers investor behavior. For instance, an underperforming company with a history of top performance in the past will still have its shares traded at considerable prices for a time, due to sheer reputation. Other companies could be performing very well after a more difficult period, but will need time to earn investor trust.
Knowing how the company performed in the past is the best way to predict stock prices. Even if, per se, this might not be relevant for companies who are capable of significant performance boosts, remember that market perception is the real deal here.
Determining future stock prices is never an exact science, but much can be done to eliminate uncertainty in this regard. As such, looking at the history and earnings of the company in question is not enough. You should also correlate stock price fluctuations with past macroeconomic conditions and events, so as to determine which of these have had a larger impact on company performance. By extending the principle, you will be able to predict stock prices by keeping a close eye on relevant factors such as economic growth, sector demand, international trade deals, tariffs and monetary & fiscal policy.
The structure of the relevant market is extremely important when thinking about how to start investing in stocks. Precisely determine how your target company is located on the market: is it an underdog, a market leader or has established itself on a niche?
In light of what has already been said, there are two main complementary techniques of determining what will influence stock prices, and thus group the main questions listed above – fundamental analysis and technical analysis. For a long time, many investors have considered the two to be at odds with each other. However, as we shall see, using both at the same time will give you a much better chance to accurately predict what will happen to stock prices.
Fundamental analysis means studying company performance from the inside out in order to determine how it will perform in the future. This means looking at income, profit, cash flows, balance sheets and other financial statements. Correctly interpreting corporate documentation requires some knowledge in the fields of accounting and business administration. Alternately, a broker or financial consultant can provide specialized assistance in this regard.
Technical analysis refers to looking primarily at overall market conditions in order to predict stock prices. This means studying product prices and product success, overall demand, marketing campaigns and public response to similar goods and services offered by competitors.
The best (and most difficult way) is to carry out both types of analyses, in order to better understand how both firm and market work, in your area of interest.
Now that you’ve become familiarized with some fundamental concepts related to trading stock, let’s talk about the actual steps you need to take in order to actually trade. While “trading” is widely used as a generic term for the entire process, the actual transaction is “executed”. So, let’s take a look at what you have to do in order to execute a stock transaction.
The first thing you will want to do when considering how to start investing in stocks is to open a brokerage account at a specialized firm. The brokerage firm, as previously mentioned, is the hub where demand and supply on the stock market meet, with broker being able to assist with all operations related to trading.
In order to open a brokerage account, most firms require you to be at least 18 years of age and to have a minimum account balance of anywhere between $500 and $1000, depending on the firm. The brokerage account can be opened online or directly at the brokerage firm’s location.
In order to avoid scams and any other type of financial unpleasantness, make sure that:
Check out a list of the best stock brokers here.
How to Start Investing in Stocks? Simply contact your broker in order to get started with your first transaction. The first thing you will want to do is buy stock. As such, there are five types of basic orders which you should know about:
The standard type of transaction. Allows you to buy or sell stock at the present market price.
If you only want to buy/sell stock at a specific price, you can opt for a limit order. This type of order only executes the transaction when the stock’s price reaches a value, or an interval, of your choosing. If the price doesn’t reach the said values, the transaction will not execute.
A stop order is a type of market order which automatically executes when stock prices reach a preset level. This allows investors to curb losses early on before stock prices fall too low (when selling), or to gain more benefits, before stock becomes too expensive (when buying).
A combination of the previous two types, the stop-limit order allows you to set a price interval when the transaction will execute. However, the transaction will also execute if the prices rise or fall too much, which allows you to simultaneously hunt for opportunities and dodge price twists.
A trailing stop order is similar to the stop order, with the notable difference that the transaction executes when stock price percentages, rather than absolute values, change. Useful for portfolios with stock from numerous companies.
While the simpler orders are what you would probably consider starting with, consult your broker in order to determine which one is best for your particular needs. Also, remember that once an order is placed, there is no turning back. Thus, carefully consider all the factors before making a transaction.
Check out more information about stock orders in this great tutorial:
If you have some minimal financial resources, business spirit and a willingness to learn something new, you will quickly find out everything about how to start investing in stocks. The steps are the same as in any other business venture: research, plan, choose a target and act! It’s really up to you and how quickly you can master some key skills. If you have a general interest in investment, you’ll also be interested in this guide.
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