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Stock Investing for Dummies

Updated on November 29, 2010

Stock Market for Dummies

The stock market is one of most popular and highly-monitored centers of the U.S. economic activity. Over the years shareholding has become a primary investment of many American households. Some even prefer to invest their money in stocks than in government insured bank deposits despite shareholding’s risky nature.

As in any investment, it is naturally important to learn the basics before committing yourself to shareholding. This article is a guide on stock market for dummies or beginners. It will cover basic processes and terminologies which you might encounter in the stock market, as well as a few tips on how to earn from it.

Best Stock Market Guides

What is the stock market?

A stock market is an organized network of transactions where investors can buy and sell stocks and shares at an agreed price. The profit you earn depends on the number of stocks or shares you own. Naturally, you earn more profit when you own more shares from a company. During the board elections, the votes of stockholders with higher shares are given more weight than those who have less.

The profit is distributed to shareholders as dividends, which are handed out after a certain period as agreed upon in the trade. Usually dividends are given either annually or quarterly.

How to choose the stocks to invest in?

There are two kinds of stocks: the common stock and preferred stock. The difference between the two lies in the security of your investment. When a company fails, preferred stockholders are paid earlier than common stockholders. Preferred stocks are pricier than common stocks.

Stock prices depend on the law of supply and demand. When a lot of investors are buying stocks from a certain company, the stock prices for that company go up. Conversely, when few investors buy stocks then the stock prices go down. The volume of investors depends on their confidence on the actual and forecasted performance of the stock. Actual performance is based on the company’s quarterly reports on their cash flow, earnings and sales. Forecasted stock performance is often based on rumors of increase or decrease of the stock value.

The best way to assess the value of the stock is to look at its earnings per share. This is the net income of a company for a given period divided by the number of shares in that company.

Before buying, you should follow the trend of your preferred stocks. Keep a watch-list to see how the stocks perform over a period of time. Six months is good enough, but the longer the evaluation period, the better.

Do not invest huge amounts of money in a single stock. Invest in stocks from different sectors. Each sector is affected by unique factors that contribute to its growth and fall. For instance, the entry of a new gadget growing in popularity may boost stocks of telecommunication companies while real properties experience a drop in prices. In this way, losses that you accrue will be canceled out by the profits you make from other sectors.

Bull markets vs bear markets

The economic situation of a country has a big effect on the stock market. When economic levels are high and unemployment levels and inflation rates are low, investor confidence is also high. Investing increases due to the anticipation of rising of stock values. This upward trend is called the bull market. On the other hand, when the economy suffers a downturn, pessimism and fear spreads among investors. This results to a declining trend in the stock market called the bear market.

Naturally it is better to invest in a bull market. You can buy stocks and wait for it to increase its value, before selling it to other investors when it reaches its peak. In a bear market, you can invest your money in defensive stocks, e.g. stocks in the food industry and telecommunications, which are not easily affected by the changing market trends.

Choosing your broker and investor

Transactions in the stock market usually happen through an intermediary called a stock broker. There are two kinds: full service brokers, who give you investment tips and analyses, and the discount brokers who do not. Full brokers charge higher commissions than the discount brokers.

You can also look for companies who offer direct investment plans (DIP). These plans allow you to buy stocks directly from the company, omitting the need to pay high commissions to brokers for a fee. DIPs are usually available for stockholders or employees of that company.

Meanwhile, some companies have Dividend Reinvestment Plans (DRIPs), which offer ways to reinvest your stock profits for a bigger share.

If you’re still learning the ropes in the stock market, first invest in established companies. Learn how the stock market works and study the factors that affect your stock's industries or sectors. It is best to consult financial experts or seasoned shareholders before buying or selling your investments.

Comments

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    • jdavis6618 profile image

      jdavis6618 7 years ago

      Very helpful and straight to the point. Great article.

    • G Miah profile image

      Gous Ahmed 7 years ago from Muslim Nation

      Brilliant, just the info i was looking for!

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