Introduction
Nowadays, the stock market is all the rage and if you haven’t heard a million things about investing in the market to make money, you must be living under a rock. Just kidding. Maybe only a little. But seriously, if you want to learn more about the process, you have come to the right place to dip your toes into the whole thing. We have tried to describe it in the most simplest of ways possible. We’ll teach you how to assess stocks to make great stock investments.
What is a share/stock?
Let’s start at the basic level and try to understand a stock/share. They mean the same thing for all intensive purposes and are linked to part ownership of a company. Basically, anytime a company decides to raise funds from outside i.e. borrow from regular people, it goes ‘public’. It raises funds by selling partial ownership of the company to people who are sold a ‘share’ in the company. These shares are traded on a stock exchange of some sort. The most popular exchanges are the New York Stock Exchange or NYSE, Nasdaq and DOW.
What’s this exchange you speak of?
These exchanges are marketplaces where shares are bought and sold. When someone is looking to sell a share that they own, they post a price at which they are willing to sell the share. Another person willing to pay that price for the share, submits the sum to the market. The market then matches these two people and facilitates the transaction.
Traditionally you needed a stock broker to transact on your behalf who would charge a small fee for their services. But now, with advances in technology, you can cut out the middleman and conduct all the trading yourself. With apps like Robinhood, Webull and M1 Finance, stock trading is easier than ever before.
Investment Strategies
Now that we have the basics out of the way, let’s talk about some general investment strategies as well. There are 3 general paths that investors take when it comes to stocks and shares.
Option A) Some investors look for short term gains and make money by buying stocks at a lower price and then quickly reselling them at a higher price to make a profit.
Option B) Other investors look to invest in stocks that they believe will return high profits way down the road. Thus they purchase stocks to hold them for a long term basis. If the company, who’s stock they hold, does well and the stock price skyrockets, they sell the shares then to reap benefits.
Option C) Lastly, there are those investors who buy stocks from companies that pay dividends to their stockholders. Their strategy is to hold on to the stocks and simply collect dividends. A dividend is a small percentage of profits paid out to the stockholder by the company as a reward for believing in them and incentivizing them to purchase even more stock and therefore invest further in the company.
What should you choose?
There are benefits and drawbacks to each of the aforementioned strategies. When it comes to the first one, the obvious advantage is the potential for making a quick profit. However, the gains earned on a quick sale of shares are taxed higher than shares held long term. The advantages and disadvantages then of the 2nd strategy are the exact opposite of the first one. The advantage of the third strategy is that as an investor, not only can you earn a consistent income from the dividends, but you also benefit from the stocks appreciating in value overtime. The disadvantage is that you have to have a lot of money invested in the stocks before you can see a return on your investment as dividends, that is substantial enough to be considered an extra source of income.
Dealing with Risks
Investing in stocks, regardless of how you choose to do so, isn’t void of any risks. There is always a chance that a company would stop doing well or worse, go bankrupt. In that case you stand to lose your investments completely. Even well established companies go through a lot of ups and downs in their stock valuations as the market conditions change based on the economy. There is not a single company in the world which doesn’t get impacted by the market upheavals.
So when you have invested in stocks, you must be able to roll with the punches and be able to stomach losses here and there. Here one of the biggest things to keep in mind, especially for the long term investors, is the fact that no one can successfully time the market i.e no one can predict when is the best time to invest in the market to make a profit.
What’s dollar cost averaging?
There have been many studies done to suggest that the dollar cost averaging strategy is a successful one to employ for investing. The strategy encourages the investors to pick a certain frequency (be it once a month or every two weeks etc) and religiously invest in the market without caring for whether the market is up or down. The success of dollar cost averaging is attributed to the fact that by not investing your money in a lump sum, allows you to spread your funds over a period of time. This way over a long enough period of time, you end up avoiding price hikes on average.
Things to consider
As an investor, your job is to make sure that you do your due diligence and research the companies whose stock you invest in. To help you understand some of the jargon that is thrown about in the world of stocks, we have put together a list of the key terms:
A Bull Market: Then the overall stock market experiences an increase in average stock prices over a prolonged period of time, it is said to be a bull market.
A Bear Market: This is then the opposite of the bull market when the stocks are generally losing value over a prolonged period of time.
Market Cap: short for market capitalization. This value is the sum total value of all the stocks of a particular company that are out in the market.
Volume: is the number of shares of a particular stock that are bought or sold during a period of time. This is usually measured daily hence the phrase ‘average daily volume trading’ is often heard.
EPS Growth: Earnings Per Share Growth is a measure of how well the stocks of a company are growing over each quarter or year. Usually an EPS rating of 25% over the year is a good indication that a company is doing well.
Although there are several other terms that you should learn over time, the aforementioned ones ought to give an idea about what to look for in stocks that you are considering buying and when to seize the right opportunity. For instance, a company with a high EPS growth percentage, coupled with a large market capital, should lend credit to its profitability and investor confidence. Similarly, a high volume coupled with bullish and bearish trends ought to give you an idea about large swings in the market in either direction (positive or negative).
In conclusion
To sum it all up, investing in the stock market is a risky proposition. You can choose to have an aggressive or a more conservative approach towards investing, depending on your risk tolerance. Regardless of which route you choose to take, you can manage some of the risks by making informed decisions and investing intelligently. This can help you enjoy a rewarding experience.
Disclaimer: Like all other posts on Hustle Domain, please keep in mind that this post is for educational and entertainment purposes only and is not meant to be financial advice. Please practice caution and do your own research before investing.