Whether you’re a total beginner who’s never bought a single stock in your life, or you’re a seasoned pro who’s been in the market for years, there’s always something to learn about investing in stocks. The world of stock investing isn’t static; it’s always changing as technology develops new ways to study companies and invest in them.
Learning how to invest in stocks takes time, patience, and practice. It can also require an iron stomach and steady nerves. Even though most investors hope stock prices go up, other people are betting they’ll go down — politics, natural disasters, wars, and different business cycles all impact prices. Individual stock investing is certainly not for the faint of heart.
Whatever level investor you are, this article has something for you. Successful investors, somewhat like pro athletes, benefit from reviewing the fundamentals of what they do. If you’re new to the game or need to get back to the basics, this guide will help you navigate through the complex world of stock investing.
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Shares, Stocks, and Equities
Although investing isn’t simple, it’s far from impossible. To truly profit from the stock market, you need to spend time and dedication, as well as money. You either need to commit to the stock market or let someone else manage your investments.
Below is a summary of the standard terms regarding investing:
When you own stock in a company, it generally means you own a piece of the business. That is the concrete reality behind the numbers and figures. People can say, “What stocks do you own?” to ask which companies did you purchase stocks from? Stocks often refer to the company you’ve invested in, but they can also refer to “shares.”
Shares refer to individual pieces of stock or a company that trades on a stock market. When companies offer to sell themselves to the public, they distribute the company in tiny pieces called shares. Shareholders are people who own shares in a company.
“Equities” are virtually interchangeable with “stocks.” When you own a stake in a company, it means you have some percentage ownership in the organizations.
A stock market refers to the environment in which individual investors, institutional investors, and businesses buy and sell shares of stock to one another. The market facilitates trading, so it’s regulated. The vast majority of trading occurs in the market and guarantees a buyer or seller for most transactions.
There are a lot of different markets around the world. While the New York Stock Exchange (NYSE) and the NASDAQ are the most recognizable, there are stock markets all around the world in different countries. These days, if you want to learn how to invest in stocks, you can do it from anywhere at any time.
First, A Few Important Words About Stock Investing
Before we get into the nitty-gritty of how to find and purchase stocks, we need to address what your approach should be. Over the years, history has shown us that investing in index funds yields higher returns than investing in individual stocks. What is an index fund? Index funds take small pieces of shares (even hundreds or thousands of stocks) to mirror the movements of the entire stock market or a specific part of the market.
For example, let’s say you want to invest in the total stock market index fund. The fund would closely mirror the performance of EVERY company listed in the public markets. However, you could also buy index funds that focus on the performance of a specific industry, such as gas or oil. The thinking behind index funds is that no one is adept enough to outperform everyone else all the time, so you’re better off just sticking with the average.
Let’s go a bit deeper. The average investor can’t compete with professional stockbrokers. These traders have way more money invested in the market than you do, and they have a ton more resources at their disposal. They’re not investing for fun while they work a full-time job. They live and breathe the markets.
You’re Competing with the Pros
We say all this to make a simple point: If you want to learn how to invest in stocks, proceed with caution. The vast majority of people are better off with long-term investing in passive investments like index funds or stock mutual funds. A mutual fund is run by professional portfolio managers who choose a group of stocks in which to invest. When you buy a share of a mutual fund, you’re purchasing small pieces of those stocks).
That said, there’s a certain allure to individual stock investing. However, don’t spend any money on individual stocks that you can’t stand to lose. Individual stocks are volatile. Use a small percentage (no more than 10%) of your assets to invest in shares with the help of a full-service broker.
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Where Can You Go to Buy stocks?
Let’s say you have a bit of money saved, and you want to start investing. The first thing you’ll need to do is find a broker and open an account. Brokers execute trades in the market on your behalf. For example, after you transfer whatever money you want to invest from your savings account into your brokerage account (broker account), that money is available for trading. When you log into your account, you’ll enter in trades, and the system transmits the information to the brokerage. The broker will execute your trade, whether you want to buy stocks or sell stocks in the market.
Brokers have adapted to the digital age. There are now online brokers that offer a ton of perks for account holders like seminars on stock investing, how to buy stocks in a retirement account, and other investing topics. They post articles about the companies you’re interested in and offer several planning tools to help you decide how to manage your money.
It’s a great time to be an online brokerage account holder. Just this year, some of the largest brokerages announced they are no longer charging for trades. In the past, people paid $5-25 a trade depending on your account type; however, many accounts now can trade freely.
If you want more of a personal touch, full-service brokers can advise you throughout your investing process. That level of personalized service incurs significant charges.
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Understanding Your Risk Appetite
Okay, you know the risks, and you’ve got the brokerage account set up with money sitting in there. Before you start investing, it’s time to take a quick personal inventory. Are you the kind of person who checks the market every day to see how your portfolio is performing? Would it kill you if you lost half of your money in a day or a week? Or are you the type of person who can handle the daily gyrations of stock prices?
These are essential questions you need to ask yourself when you learn how to invest in stocks because they’ll affect what kind of shares you buy. Different types of stocks are more volatile than others. You may have heard the saying, “the greater the risk, the greater the reward.” While higher risk stocks offer much larger potential gains, they also carry the possibility of a complete loss of investment.
Here’s a breakdown of some of the broad categories of stocks and their correlated risk profile.
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Large Cap Stocks
The “cap” here refers to “capitalization.” Capitalization means the total size of the money invested in a company. People use capitalization as an approximation of the worth and size of a company. For instance, Apple, Microsoft, Exxon, and any business with a market cap of over $10 billion are all large-cap stocks. That means a bunch of people invest and trade shares in the company.
Also referred to as blue-chip stocks, these are often the most liquid. Liquidity refers to how easy something is to buy or sell. Shares of Apple, for example, are very liquid. Whenever you want to buy a stock, odds are it’s straightforward to find someone selling one. Real estate, on the other hand, is viewed as not very liquid. It often takes months to close a real estate deal.
Because large-cap stocks are easily transferable and belong to household names with long histories, they’re generally lower risk. Therefore, you won’t get as much short-term movement in the stock price. You’re not going to wake up with your money doubled, but you’re also probably not going to wake up wiped out either. Large-cap stocks are for more conservative stock investors.
Mid Cap Stocks
Mid caps are any company with a market cap between $2 billion and $10 billion. They’re seen as safer investments than small-cap stocks, but riskier than large caps.
Small cap companies have market caps from $300 million to $2 billion. These are less-established companies whose stocks are more prone to sudden shifts. When times are good, returns on small and mid-cap stocks generally outperform large caps. However, in recessions or slides in the market, investors flee into large-cap stocks for safety, boosting their returns.
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Common stock is what 99% of people think of like stocks. They are tradable in open markets and represent a small piece of ownership in a company. If you possess common stock, you hold voting rights in a public company on a variety of issues like executive pay and whether to sell to a competitor. Pretty much all of the time, when you’re buying and selling shares through a brokerage account, you’re trading in common stock.
Preferred stockholders have no voting rights but are paid a special dividend before any common stock shareholders. Companies usually issue preferred stock as a way to raise capital without having to go into debt.
Diversify to Reduce Risk
If you’re already investing in index funds, exchange-traded funds (ETFs), or mutual funds in your retirement accounts, but are curious about trying an individual stock investing, consider diversification. Diversification means spreading your investments across different industries and companies as a way to protect against catastrophic losses.
Concentrating your money into one or just a few investments may seem like a good idea when you learn how to invest in stocks. However, publicly traded companies regularly get hit with unexpected bad news, government fines, or external factors like disruption to supply chains. These changes can send a stock price sinking. If you’ve got all your money tied up in that one company, you’ll suffer significant losses.
However, when you learn how to invest, it’s smart to play it safe and diversify across companies. As a general rule, you shouldn’t have more than 10% of your portfolio in a single stock. That’s across your whole portfolio, including retirement funds. So, if you have the extra money in an online brokerage account and want to buy a particular stock because you love the company, then it’s probably not a big deal. Just don’t build too much of a position that you get nervous with the thought of losses.
Finding a Stock for Your First Purchase
Now that you’ve opened an account and settled on how much risk you’re comfortable with, you are ready to buy. First, you need to find a company in which to invest. If it’s your first stock purchase, it’s prudent to go with a well-known large-cap company whose price will remain stable. Remember, the stocks you invest in really should align with your risk appetite.
If you’ve heard of a company with a hot new product and are comfortable with the risk, go ahead and scoop up some shares. There are a million ways to determine which stocks to buy. People often tell people with children to watch emerging trends among kids and teenagers. They’re usually a leading indicator of whatever technology, gadget or fad that will become a more significant trend.
The issue with searching for a stock is that you are privy to the same information as everyone else. The government mandates publicly traded companies against selectively publishing or sharing information that could influence its stock price. Everyone needs to get the information at the same time, or else companies face severe penalties. When companies or individuals trade on non-public information, that’s called insider trading, and it is illegal.
If you’re stuck, invest in the companies you love. It will keep you in the investing game and less likely to panic if the price goes down. You’ll also get the satisfaction of being a small part owner in a business that you admire. You’ll take more notice of what the company is up to in terms of new products, locations, or other announcements.
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The Best Way to Learn How to Invest in stocks is by Putting in Your First Order
Experience is often the best teacher, and stock investing is no different. Most investors still remember the first order they ever placed. They also remember how they reacted the first time they faced stressful losses. It’s all a learning process that helps us get better with time. Putting in your first order is the best way to learn how to invest in stocks. It will get you over the hump and make you more comfortable with doing it again.
There’s a lot that goes into orders that can help you protect your portfolio. Here are some things you need to know about placing an order in an online brokerage account.
Find the Stock Ticker
Companies listed on stock exchanges have what’s called a ticker symbol. The ticker symbol is an abbreviation of two, three, or four letters. It’s a legacy procedure that helps computers trade shares. For example, Bank of America’s ticker symbol is BAC. Microsoft’s is MSFT.
Brokers will have a search bar in their online portals where you can search for the ticker symbol. Enter the company name and wait for the ticker symbol to appear.
Open an Order
Somewhere on your trading platform, there will be a “trade” or “order” button that will open an order form. There are usually fields to fill in, like the ticker symbol of what you want to order and the number of shares you want to buy. Additionally, you can specify if you wish to pay whatever is the “market price” of the stock or if there is a specific price you want to pay.
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Market Price and Limit Price
If you complete an order for 100 shares of a company at market price, your broker is going to go out into the virtual market and say, “Hey, I have a customer who wants to buy 100 shares of X company.” Then, whoever has shares in that company can sell them to you for whatever price they want.
Usually, the market price doesn’t stray too far from whatever amount you’re seeing when you’re filling out the order. It’s also not a huge deal if you pay a few more cents a share when you’re dealing with small quantities of shares. However, if you’re trading large amounts, those cents can add up to a lot of dollars. As a best practice, avoid putting in market orders.
Limit prices, on the other hand, let you dictate what price you want to pay. Limit prices are a godsend for folks learning how to invest in stocks. Let’s say a stock is trading at $25.25. You can set the limit price at $25.26, and your broker will go out and find only sellers willing to sell to you for that price or less. It avoids any shenanigans from happening when your order completes.
When your form is all filled out, you’ll click send (some brokers make you preview the order before confirming), and the order goes off! The order will be pending until your broker has found enough shares for sale to fill it. Once your broker fills your request, he’ll send a confirmation notice.
You can specify on your order form whether you will accept an order that’s partially filled. That’s useful in situations where you want to pay a specific price but aren’t sure that there will be enough shares available at that price. Your broker will fill as much of the order as possible without going over your limit price.
A stop is something you can arrange with your broker to protect your assets. Stops sell shares in a company if it’s stock price drops below a certain level. Let’s say you have a demanding full-time job and can’t regularly watch the market, then a company you invested in gets some awful news, and the stock starts to tank. Instead of riding the share price down, you can have stops in place that sell at specified levels. So, if you bought a stock for $100 a share, but don’t want to keep it if it goes below $80, put stops in to sell if it dips that low.
Eventually, you’ll have to sell some shares. Whether you’re a long-term investor who wants to hold stocks for decades or want to lock in a bit of money on a fast trade, you’ll need to know how to sell.
Selling shares isn’t complicated. It’s the reverse process of buying. You open an order form, select “sell” and enter the ticker symbol and quantity of shares you want to sell. Just like with purchase orders, you can list limit prices to protect your investment.
Shorting stocks is a bit more complicated. It’s probably not for beginners learning how to invest in stocks. When you short a stock, you’re betting against it. You think, for what could be several reasons that the share price will go down not up.
To short a stock, you mostly have to find someone who will lend you their shares. You immediately sell them in the market. Once the stock price (hopefully) drops, you repurchase them at a lower price and return them to their original owner. You get to keep the difference between what you sold them for initially and what you bought them for the second time.
Shorting stocks is a much higher risk than buying stocks. While stock prices can drop to zero, they can go the opposite way as well and have an unlimited upside. To return the shares you borrowed, you’ll have to eventually pay a much higher price than what you borrowed them at, and the loss will be yours to eat.
What Affects Stock Prices?
There are a lot of things that affect stock prices. We’ve covered some of the general ones like storms, geopolitics, and regulatory issues. It’s also important to remember that excellent performance boosts stock prices. Mergers between companies, scientific breakthroughs, new products, hiring a superstar leader, and several other events will change the number of stocks.
Stocks are frequently moved by overall economic conditions, as well. If the economy is good, then generally, the stock market rises. If a recession hits, they tend to go down.
Public companies in different sectors also see their stock prices fluctuate differently. Consumer goods stocks are generally less volatile than technology stocks, and retail stocks are calmer than biotech shares.
Some companies pay a dividend which also impacts their stock price. A dividend is how companies funnel cash back into investors’ pockets. At scheduled intervals throughout the year, companies will pay out a certain amount per share to investors in cash payments called dividends.
Companies that pay dividends generally have less growth in their stock price because it’s seen as more of an income play. People aren’t rushing into the stock in hopes that it will double or triple. They buy the shares because they want a steady successful business that will deliver regular income.
Think About Using a Virtual Portfolio to Start
One great piece of advice for people who want to learn how to invest in stocks is to use a virtual portfolio. Brokers offer customers virtual collections that mirror their actual trading platforms. Everything from the order process, research resources, and the ticker symbol are precisely what the real thing would be.
In a virtual portfolio, you can create an imaginary portfolio amount in which you want to invest. That money sits in the account, and you can start making make-believe trades with fake money. You can work through reading about companies and zeroing in on which stocks you want to own. You’ll run through several trades to see what happens when you enter the market versus limit orders.
It’s a great tool to learn how to invest in stocks without losing any actual money. Once you’re comfortable with the online tools, then it’s time to give the real thing a go.
The Final Word
Like we said at the beginning, there are levels of depth to stock investing. Remember, it’s improbable that you’ll beat the market over time. Even professionals rarely do it consistently. Stay safe and keep most of your assets in index funds that mirror the overall market. Don’t trade individual stocks with anything more than 10% of your portfolio. If you’re new to stock trading: buy household names that you enjoy. Keep up with news and developments around the company. Put protections in place to stop you from suffering substantial losses. Most of all, have fun learning to invest. There’s nothing quite like investing in the stock market and seeing your money grow over time! What are you going to do to get started?