Who doesn’t want to own a business. Especially one where you can keep your hands off and still make money. Sound crazy? It isn’t. We’re talking of course, of stocks.
In terms of building wealth for the average person, there has never been a better invention than stocks and the stock market. Almost every investment portfolio you will ever encounter is based primarily on stocks. Everyone from the simplest man to the richest billionaire can make serious money on the stock market.
However, despite many people knowing that stocks may be the key to becoming wealthy, they do not understand them fully. People may hear their friends talking about them, but may not understand the intricacies. Not understanding how the stock market works can be disastrous.
This is why we have put together this stock market for beginners step by step guide. It will educate you, and arm you with all the information you need to make a start at the stock market. Starting with what a stock is, all the way to how to trade, and how the market works.
Step 1 – What Exactly Are Stocks?
To put it simply, a stock is a share in a company. Every stock that you buy of a company means that you own a (usually extremely small) percentage of that company.
As an owner of stock, you own a small percentage of everything the company does. From the chairs in the office to the property that the company owns.
This also means that you own a percentage of the companies profits, which you receive yearly in the form of a dividend.
A common misunderstanding is that because you own a small percentage of the company, you get to have a say in how it is run. This is true to a certain extent, but you only have this power indirectly.
This is exercised by your voting power, which you use to elect members of the board who will run the company in the way they have outlined. Obviously, the more stocks you own, the more say you will have in who is elected.
What Happens In A Company Bankruptcy Or Liquidation?
So you get a vote and how the company is run, as well as an annual share of the profits. But what happens if the company goes under?
The simple answer is that you probably won’t get anything. All of the companies other financial obligations come before the shareholders. If there is anything left afterwards, then you will receive a share of that.
You must always be aware of the risk when you buy a companies stocks.
Step 2 – What Are The Different Types Of Stocks
There are two main types of stock that are available to trade and buy. Common stock, and preferred stock:
In the vast majority of cases, when people are talking about stocks – this is what they are referring to. These match the properties that were outlined in the first section. You buy a share of the company, which you then old. The company is obliged to pay you a share of the profits in dividends, and you get a vote on board members.
These are some of the best investments you can make. Over the long term there are very few investments that can yield such returns.
Of course there is also a risk. If the company goes bankrupt, then you lose the value of the share. The price of shares can also go down.
This is similar to a common stock in that you own a share of the company, however this is where the similarities end.
You do not get a vote on company matters, however you are guaranteed a fixed dividend every year. This is unlike common stock, where your dividend is not guaranteed.
Other benefits include in the event of liquidation, you would receive money before common shareholders. The company also has the right to buy back the stock at a premium at any time they choose (in most cases).
Step 3 – How Do You Trade Stocks?
Almost every stock (and any that you will likely encounter) are traded on exchanges. These are where the buyers and sellers of stocks meet to carry out transactions (usually not physically meeting). Some are like you will have seen on TV, with arms waving, and shouting. But some are entirely virtual.
The main reason that stock exchanges exist is so that buyers and sellers can easily find each other.
There are two main types of stock exchanges:
– Primary Exchange – This is where a companies stocks are listed for the first time, before anyone else has bought them.
– Secondary Exchange – This is what most people would mean when they stock exchange. This is where you buy stocks of other owners of the stocks.
One important thing to remember is that you aren’t buying shares of the company itself.
There are numerous stock exchanges around the world. Here are some of the biggest and most well known:
– New York Stock Exchange – Much of the trading here is done on the floor of the exchange. Specialists on the floor find buyers and sellers and carry out the transaction.
– NASDAQ – This is a virtual stock exchange. There is no physical presence on the floor. All trades are done digitally.
– London Stock Exchange – The largest foreign stock exchange. Many companies, both UK, and international, are listed here.
Step 4 – Why Does The Price Of Stocks Change?
Stock prices change for the same reasons as anything else changes, market forces. It is just that in stocks, these changes can be more dramatic.
To put it simply, if more people want to by stocks, the price goes up. Whereas if people don’t want to buy the stocks, the price will drop.
The key to understanding why the price of stocks changes, is to understand the news about the company. To give an example, a company that has just won a major multi-billion dollar contract is probably going to see its share price rise. This is because people will see this, and begin to think that this company has the potential to make a large profit, so they will want to own a percentage of this company.
Conversely, a company that has just announced that profits are lower, might see a fall in its share price, as people do not want to buy stocks in a struggling company.
Learning to read these signs, so that you know when to buy and sell, is key to becoming a success on the stock market. It is what makes truly successful investors billionaires.
Step 5 – How Do You Buy Stocks?
So, you’ve got a basic understanding of how stocks work, what they are, and where they are traded. But how do you go about buying them if you are interested?
There are two main ways of purchasing stocks (and fortunately none of them require you to shout in the pit at the NYSE):
Using a brokerage is by far the most common way of purchasing stocks. There are several distinct types of brokers.
There are brokers that are known as ‘full service’ they will guide you through the entire process, manage your account, and give you expert advice. There are also discount brokers. They won’t give you any advice, but they are the cheapest way of purchasing stocks.
DRIPs & DIPs
Dividend reinvestment plans (DRIPs) and direct investment plans (DIPs), to give them their full name, are a method of purchasing stocks where you buy the stocks from the company directly. Usually at regular intervals. This gives you a fantastic opportunity to invest small amounts of money regularly.
Step 6 – How Do You Read A Stock Table Or Quote?
At first, a stock quote or table can seem confusing. Especially if you are a first time investor. But it doesn’t need to be. Once you know what you are looking at it is surprisingly simple.
There are 12 columns, each having a separate focus, and all together giving you all the insights you will need to purchase this stock. Here is an explanation of each column.
Column 1 – The 52 week high. This is the highest the stock has been over the last 52 weeks.
Column 2 – The 52 week low. The lowest the stock has been over the last 52 weeks.
Column 3 – The name of the stock. The name of the company. If it is has pf after the letters it means it is preferred stock.
Column 4 – The ticker symbol. The alphabetical symbol that signifies this company on tickers and other displays.
Column 5 – The dividend per share. The exact dividend that owners of the share have received that year. If the column is blank, then there has been no dividend that year.
Column 6 – The dividend yield. This lets you know the percentage return of the dividend. It is calculated using the formula of annual dividend per share divided by cost of share.
Column 7 – The price/earnings ratio – The calculation of the current stock price divided by earnings per share for the last four quarters.
Column 8 – The trading volume. This lets you know how many (in hundreds) shares have been traded for the day.
Column 9 – The day high. The highest the stock has traded that day.
Column 10 – The day low. The lowers the stock traded that day.
Column 11 – The closing price. What the share price at the close of trading that day.
Column 12 – The net change. This lets you know how much the stock price changed that day compared to the close of trading the previous day.
Step 7 – What Are The Bulls & The Bears?
They may sound like sports teams, but they are anything but. They are actually the different types of market, and if you begin to invest, you will quickly become aware of what they mean, and how to make the most of the various types of market:
Also known as a ‘Bull Market’, this is where the economy is in good shape. GDP is high, people are getting jobs. A ‘Bull Market’ is easiest for the beginner, as it is much easier to choose stocks because so many of them are increasing.
Of course, you have to remember that a ‘Bull Market’ cannot last forever. So be aware of that when investing in stocks.
A ‘Bear Market’ is the exact opposite, it is the market when the economy has gone bad. Recession may be coming, and the prices of stocks are falling. When a ‘Bear Market’ is in effect, it is more difficult to choose the right stocks.
The main way to make money for experts during a ‘Bear Market’ is ‘short selling’. However for beginners, it is better to sit on the sidelines and wait for the ‘Bull Market’ to re appear.
Stock market is an intimidating place to start however if you get the hang of it then it can be fun and rewarding. Before you can start this amazing journey there are several things that you need to know and also understand the big picture.