Stock trading is said to be the best way for beginners to enter the world of investments. Traders can take part in the stock market with small investments. Stock trading is one of the best ways to increase your wealth as your trade grows. Even during times of volatility in the stock market, it merely means that you have to sell the stocks, and traders can trade against such volatility to reap benefits.
In this article, we will discuss the whole nine yards of stock trading that you must know before you step in.
Stock trading: An introduction
Stocks are the securities or instruments of trade that represent a part of ownership in a particular company or institution. Companies issue shares and stocks as a way to increase their capital and wealth, and to increase the investment in their business. For traders and investors, stock trading is a way to make profitable returns on their investments in stocks and outdo inflation over time.
Public companies such as Starbucks or Apple sell their stocks through stock exchanges like the New York Stock Exchange. And the investor and traders then buy the stocks of such public companies through a broker. Here, the stockbroker acts as a connecting bridge between the big companies and stock traders. The stockbroker usually charges a commission on facilitating the trade.
Isn’t it amazing that when you buy stocks of a particular company, you are actually buying a small part in that company? You can always choose to buy parts of the companies that you really like and admire.
It is essential for investors to spread their investments in various companies, and not focus most of their money on a single company. The prices of the stock market fluctuate every now and then. Investors hope that eventually, the prices of stock will rise in value. But that might not happen.
When a company goes out of its operations and loses money, the investor may lose the money that he or she invested in the company. Therefore, spreading investments seems a safer choice.
Types of stocks
There are two main types of stocks; preferred and common stocks.
1. Common stocks
If you are new to the stock trading market and are looking to buy a few stocks, then you should go with common stocks. Common stocks are precisely what the name suggests; the commoners in the stock trading market.
When you invest in the common stock of a company, you become a part-owner in the profits of the company and also acquire a right to vote in that particular company. With common stocks, investors may or may not earn dividends. Such dividends vary and do not hold a guarantee.
Common stocks work best for investors looking for long-term growth.
- Common stocks have a high potential for massive long-term profits.
- Gives you the voting rights in a company
- Dividends are low and not guaranteed.
- Stock prices tend to be more volatile.
- More chances of losing investment if the company loses business.
2. Preferred Stocks
Preferred stocks, every now and then are compared to bonds. Here, the dividend is fixed. As the name suggests, the owners of preferred stocks get preferential treatment when dividends are distributed. They get dividends before the common stock owners, even in case of bankruptcy and liquidation of the company.
The prices of preferred stocks tend to be less volatile as compared to common stocks.
Preferred stocks are more suitable for investors looking for income rather than long-term wealth.
- Dividends are higher and guaranteed.
- Less volatile share prices.
- In case of bankruptcy, the preferred stockholders are likely to get at least a part of their investments.
- No voting rights.
- The lower potential for long-term growth.
Difference between individual stocks and stock funds
1. Individual stocks: If you are after a particular company, then you can buy a single or few stocks of that company. That way, you will be investing in individual stocks. Investing in individual stocks requires thorough research about the companies you are investing in, their operations, financial records and other essential aspects. Investing in individual stocks is one way of creating a diversified portfolio, but it requires a lot of time and extensive research.
2. ETFs, stock mutual funds, and index: With mutual funds, you can purchase stocks of different companies in one transaction. ETFs and index funds are kinds of mutual funds that trail and track an index and then clone that index to buy stocks of companies in that index. Investing in stocks through mutual funds is one of the best ways to build a diversified and varied portfolio.
Bull and bear market in stock trading
A bear market in stock trading prevails when the price of shares of various companies are falling, mostly until 20 percent or more. In a bear market, the economy is unhealthy, and the functioning and profits of companies are disrupted. This reduces the demand for shares in the market, leading to a fall in prices. In a bear market situation, stock traders are trying to pull out of the market.
A bull market, on the other hand, indicates a rise in the prices of shares. In a bull market situation, investors are confident, demands for stocks of various companies increase, and so do their values.
The good news here is that bull markets tend to last far longer as compared to bear markets. That is why many investors in stock trading tend to look at the bigger picture and invest in long-term growth.
Why is diversification important in stock trading?
You cannot avoid the bearish market situation in stock trading, but you can always spread out and mitigate your risks. That is what diversification of a portfolio does. Spreading your investments around various companies helps you lower the risks and safeguard your finances.
Diversification helps you in protecting your portfolio against unhealthy market situations and setbacks. When you put all your money in one single company, you are actually betting on the triumph that can change to the opposite anytime due to issues of regulation, lack of good leadership or anything else.
To smooth out such shortcomings, investors and traders pool in a variety of stocks from different companies balancing out the risk in the entire portfolio.
A trader can mix up the funds and individual stocks in his or her portfolio. We would suggest that you dedicate ten percent or so of your portfolio to individual stocks and the rest to stock funds.
Stock trading: correction and crash
There is a difference between the correction of the stock trading market and when the market crashes. A correction in the stock market happens when the market drops by 10 percent or more.
A market crash takes place when there is an abrupt and extreme fall in prices. A market crash can be an indicator of a bearish market situation. But as we mentioned above, the bull market situations tend to stick longer than bear markets. This means that the stock market tends to increase in value over time.
If you focus on the long run in the stock market, you do not have to fret about crashes in the market.
Deciding on how to invest in stock trading
There are two ways in which a trader can approach a stock market. One way is to go with the “do it yourself” option. Here, the trader decides to hand-pick the securities for her or his portfolio. For this, the trader or investor needs to have a brokerage account to facilitate the trade in the stock market.
If you are looking for an online broker to facilitate the trade, we would recommend ABinvesting. It is a regulated broker offering trade in a wide range of instruments like stocks, forex, indices, commodities, metals, ETFs, and more.
The other way investors go about stock trading is by taking help and advice in the trade. Here, the best option is to open a Robo-advisor account. A Robo-advisor account will not require the efforts of hand-picking securities to trade. Such accounts provide all-inclusive management of trade. The trader or investor is asked about his or her financial goals, and the account then customizes a portfolio concerning the financial goals of the trader.
Things to remember about stock trading: Conclusion
- In the stock market, if investors want to sustain themselves in the long run, then they must buy and hold. Patience is the key. Long-term investors focus on diversifying their portfolios with a wide range of stocks from different companies. They hold onto stocks in both merry and sorrow.
- While investing in individual stocks, investors must not forget to do thorough research about companies they are putting money in. To save time, one can go with stock funds, indexes, or ETFs.
- Finally, investors must keep in mind their financial goals and how, in which direction they want their investments to pan out, and invest accordingly.