Stock Market Basics: 4 Tips for Beginners
Historically, people have considered stocks to be an excellent investment vehicle. Stock investments have been popular with Americans for decades and show no signs of changing any time soon. According to a 2021 Gallup study, 56 percent of Americans reported owning stocks. Historically, the number has maintained this average, although slightly higher before the Great Recession of 2008.
Regardless, stocks continue to be a popular investment vehicle, and for a good reason. According to data from Goldman Sachs, the stock market has yielded a 9.2 percent average return over the past ten years. The average US inflation rate during this period has lingered around 3.24 percent. That means stocks are a fantastic way to accumulate wealth without worrying about inflation.
As a result, people often gravitate towards the stock market. However, making money in the stock market is easier said than done. It requires time and effort before you can even think about making profits in the stock market. Unfortunately, many people skip past the basics and dive into stock trading and investing. Usually, it doesn’t work out well for these people.
Before you jump headfirst into the world of stocks, let’s assess some of the things you need to know.
A stock investor following the New York Stock Exchange
Trading or Investing?
Many people often use trading and investing interchangeably. However, they generally mean different things. Two varying approaches exist to stocks. The first is active investing, while the other is passive investing. When people use the term trading, they’re referring to active investing. Traders generally enjoy the thrill of making trades. They want to be active players in the market. As a result, most traders will employ a day trading or swing trading approach. Day traders hold their positions for a few hours, clearing them before the market closes. On the flip side, swing traders maintain their positions for a few days, or in some cases, even a few weeks.
On the other hand, passive investors have a different approach. They’ll buy stocks with stability and long-term growth potential. While active investors are focused on short-term profits, passive investors are looking at five or ten years in the future. They don’t want to be actively involved in the stock market. Instead, they want to get dividends while owning a stock and watching its value grow.
Therefore, before proceeding, make sure to select an approach that works for you.
Stock Market Basics: Tips for Beginners
Stock markets can be extensive and complex. Beginner traders should stick to tried and tested methods. After they develop a comprehensive understanding of how markets work, they can try new strategies. Here are some tips to follow:
Buying the Right Stock
Buying the right stock can be challenging. You’ll have to do significant research before you can find stocks that will generate sizable returns. Finding stocks that performed well in the past is straightforward. However, it takes skill to find stocks that will perform well in the future. Most traders and investors use fundamental and technical analysis to find the right investments.
Fundamental analysis looks at a company’s fundamental factors like stock price, revenue, profit, etc. Investors and traders use these fundamentals for evaluation through numerous metrics. These metrics include valuation metrics and liquidity metrics. Generally, stockholders will assess a company’s earnings per share and use it to calculate the price-to-earnings ratio. The price-to-earnings ratio (PE) ratio measures share price against earnings per share. Typically, the higher the PE ratio, the more overvalued a company’s stock. However, the PE ratio has its drawbacks. It’s not an accurate tool for companies in some sectors like the tech industry. Many tech companies often lose money initially as they aim to acquire more customers. The PE ratio doesn’t work in such cases.
Technical analysis is a tool that most traders use. It focuses on a stock’s price and volume. Traders typically use technical analysis to determine how supply and demand for a stock will change its price, volume, and volatility.
You’ll have to use fundamental and technical analysis to pick winning stocks. In addition, you’ll also need to meticulously comb through a company’s financial reports – both quarterly and annual – to get the complete picture. Furthermore, you’ll have to assess a company’s performance with rivals and the industry average.
A stock market investor catching up on the latest market developments
Diversify Your Portfolio
Many people are so focused on profits; they forget to manage risk. Diversifying your portfolio is crucial. Otherwise, you could incur significant losses. For instance, you might buy one stock, and its value might increase, tempting you to purchase more. You repeat this cycle until all your investment capital is fixated on this one stock. Suddenly, the stock dips. You find yourself incurring a loss. That’s because you’ve put all your eggs in one basket.
Diversifying your portfolio is essential because it protects you from individual stock risk. Likewise, it also saves you from industry risk. For instance, let’s assume you only bought automotive stocks. The recent global semiconductor chip shortage has caused most automotive stocks to decline. However, if you had invested in several different industries’ stocks, you could have avoided this problem.
Use Demo Accounts
Jumping headfirst into the stock market without prior knowledge or experience is a recipe for disaster. Consider trying your hand at the stock market with a demo account. Most trading platforms enable you to create demo accounts to help you practice. You’ll use virtual money when using these accounts. That means your hard-earned money isn’t at risk.
Selecting the Right Stockbroker
You’ll need a stockbroker to invest in the stock market. Typically, two types of traditional brokerages exist. They include full-service and discount brokers. Full-service brokers provide financial advice, asset management, and numerous other services. However, they also charge substantial fees. On the flip side, discount brokers usually have low transaction fees and minimum deposit requirements. However, their range of services isn’t as extensive.
Stocks on a smartphone
Get Started with Crystal Ball Markets
A plethora of online investment platforms exist. However, not all online trading platforms are equal. Crystal Ball Markets is one of the best online stock platforms around. If you’re getting started in stocks, consider choosing the best online stockbroker. Visit our website today for more information. Alternatively, you can register with us today to get started.