The stock market gives several opportunities to grow your funds. But, first, learn stock market investing; if you are new to it and wish to make most of the options while making a substantial amount, then this article is for you.
As a beginner to the stock market, you might find it challenging when you begin. There are various instruments, each with its unique features providing respective gains. Some give quick returns but are risky, while some are safe but take a long time to provide substantial investment returns.
The word “stock” is widely used to denote a small part of the company, also known as a “share”. When you buy a company’s stock, you enjoy a slice of ownership of a company. Then, depending upon the company’s performance, you are eligible for bonuses or dividends, or are often granted more stocks instead of bonuses or dividends.
You must first analyze why you want to invest in the stock market? For further studies, vacation, extra income, retirement plans, and paying off house loans. You also have the option of leverages, where you require minimum capital to gain substantial gains.
Once you have figured out why you need to invest in the stock market, you need to plan your investment.
When you are young, you have an upper hand as you have more time to research and invest, an opportunity to earn more compared to the elderly. Although you do not have enough money available, you are quite sure that by the time you hit the retirement age, you will have plenty of money by your side. As a thumb rule, invest 15% of your annual pay.
Since you are new to the stock market, it would be wise to invest in Blue-Chip companies. These companies have less volatility in their price and would sustain the onslaught during bearish trends in the stock market. The price of these stocks is high; buy them in small chunks over a period. The returns are small compared to the rest, but the chances of you going bankrupt are almost close to zero.
If you have sufficient funds, then you can take the risk of investing in Mid-Cap companies, Micro-Cap, Small-Cap companies, and Initial Public Offerings or IPOs.
Mid-Cap is next in line after Blue-Chip stocks; the returns are more compared to Blue-Chips. But they experience some fluctuation in their price. However, these stocks are cheap compared to Blue-Chips. They give out fair returns.
Micro-Cap or Small-Cap come after Mid-Cap and are cheaper and more volatile than Mid-Caps. Since the price fluctuation is relatively high compared to Mid-Caps, the returns are also good. However, these stocks carry substantial risks.
Initial Public Offerings, or IPOs, are the most volatile of the stocks. When a company goes public, they need crowd funding, which is done by approaching the market. The prices of these IPOs are pretty low and are highly volatile. They also risk going bankrupt within a year since they are yet to perform in the market. Since they have to find their foothold in the market, the price of these companies’ stocks can be sold for a Premium or Discount depending on how the people approach the book-keeper.
It will help if you research before selecting a company. But, first, you need to check the company’s performance with the help of these tools; the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE).
Thus, you can build up a portfolio that is nothing but a collection of different stocks from varied sectors, allowing you to spread the risk instead of betting everything on a single stock.
Types of Instruments in the Stock Market:
Different instruments give distinct returns. If you wish to learn stock market investing, you should be aware of these instruments.
Stocks: As we already mentioned, there are different types of stocks, each with their unique features and market performances. The companies are classified as Blue-Chip, Mid-Cap, Small-Cap, Micro-Cap and Initial Public Offerings depending upon their market capitalization. The first three performing stocks in a sector are usually called Blue-Chips. Companies like Coca-cola, IMB, and Apple are some of the Blue Chip companies. Golden Sun Education Group Limited and Heart Test Laboratories Inc. are some of the latest IPO entrants.
ETFs, Mutual Funds, Index Funds, Future Contracts, Forward Contracts, Options, Currency derivatives, Metals, and CFDs are some other alternatives that a stock trader can explore.
Define your budget:
Now that you know different types of instruments, now is the time to look at your budget so that you can understand how much money you can spare for trading in the stock market. As you learn stock market investing, you should consider how much money you can spare to invest wisely in the stock market.
You also need to keep aside a portion of money for your retirement. Use a retirement calculator that will help you roughly estimate how much money you will need for your retirement after including the inflation rate. Make sure that you don’t eat away your retirement money.
Adopting investment strategy:
As you learn stock market investing, you should choose your investment style based on how risk averse you are; in other words, the amount of money you are willing to lose.
There are two approaches to investing in the stock market- Passive and Active. The active traders may endorse stock trading as a full time thing while the passive investors look at it as a side hustle. The volume of their trades and time spent in research may also vary drastically among the two trading personalities.
Choosing the right investing accounts:
Choosing the right investing account can help you save a lot of money. Be wary as many brokers or firms are not regulated or registered. Thus, in the long run, it can prove detrimental to your success. Therefore, you need to understand their fees and policies before proceeding.
Investing in an employer-sponsored 401(k) is the most straightforward method to get started. But, first, ask your employer whether they would mind a portion of your contribution.
Once you make a portfolio, ensure it is well spread to minimize the risk of losing your entire money when the bearish trend begins. Next, adjust your assets and sell off the non-performing assets. Finally, research while adding or selling an asset.
As you are keen to learn stock market investing, you should thoroughly research and adjust your trading style. Investing in more than what you can tolerate losing can prove fatal for your financial goals.