- Personal Finance»
- Investing in Stocks, Bonds, Real Estate, More»
Stock Market Tips for Newbie Traders
Understanding The Market
For this reason you need to know what you are doing before you jump right in.
Here we look at some stock market tips for those who are new to the world of trading.
Success is what you are aiming for when you trade in the stock market. What you need to decide first is your purpose for trading. What is the goal that underlies it?
Are you looking for an additional source of income or do you want to grow your money so you can retire more comfortably?
Or perhaps do you hope to retire at an earlier age than you had originally anticipated?
Before you begin trading you need to carefully define your goal(s). Once you do that then you can devise a strategy for trading that will allow you to reach your goal.
Speaking of trading strategies, you need to learn to be as versatile and flexible as possible.
This is because no one strategy will work in all of the markets, nor will it work all of the time. You need to develop at least three or more trading strategies. For example, you need one strategy for when the markets are moving higher, another for when they are moving sideways and yet another for when they are falling.
Hiring a broker is expensive and for that reason you should either find a broker at a low cost or choose to do your own investing. As long as your investing education is good you should not encounter any problems doing your own investing once you understand how it works and get the hang of it.
For example, it can cost you in the range of hundreds of dollars to hire a full service broker to place a single trade for you. On the other hand, if you are a shrewd shopper you can find an online discount broker who can place a trade for you and it will cost you five dollars per trade (or in some cases, even less).
Before you go ahead and invest your money, take the time to practice paper trading with your stocks and your strategies. When you hear the term "Paper Trading" all it means is that you locate the stocks that you wish to invest in and from there you play act by pretending to purchase them.
Do this for a time until you feel confident, comfortable and competent about trading real money. You will know you are ready to trade with real money once your paper trades show profits on paper on a consistent basis.
The stock market can be tough for those who are just starting out. For that reason you need to decide on an exit strategy before you purchase any stocks whatsoever. You need a plan before you buy a stock and then you need to stick with it after the purchase has been made.
You also need to figure out at which price you will exit at on the upside or the downside. Be consistent with the plan you set for yourself.
A Look At Stocks
Stocks and the trading of stocks is what make the stock market go round and round.
To understand how the stock market works you first need to have a basic understanding of what stocks are all about. A basic definition of a stock is a good place to start. The definition of a stock is a share in the ownership of any given company.
Stocks lay claim to the earnings and the assets of the company which means that the more stock a person has in a company, the greater is their ownership stake. Other words that are commonly used in this regard that mean the same as stocks are equity and shares.
If you decide to invest in stocks then you become a shareholder in the company. This is to say, therefore, part owner based on how many stocks you have purchased. Technically then you have a small claim on everything the company has from their furniture, to their contracts, to their trademark and so on.
As a shareholder you have voting rights when it comes to making decisions and you are entitled to your portion of the company's earnings.
What Is A Stock Certificate
The owning of stocks is represented by something known as a stock certificate. This certificate is proof of your ownership of stocks on paper. Years ago the shareholder was able to physically see the piece of paper but in the modern computer age the brokerage you deal with is likely to keep all of these records electronically. When shares are held in this manner it is referred to as holding shares "in street name."
This is done because it simplifies the process of trading shares. Trading by way of a computer or by way of the telephone makes for ease of convenience. Traditionally, if an individual wished to sell his shares he had to deliver the stock certificate to the brokerage himself.
It is important to be aware however that you do not become all-powerful just because you are a shareholder in a company. As well, it does not mean that you have any kind of say in how a business is run on a daily basis. What does come with owning a share is a vote for every share. The more shares you have the more votes you get. Your votes count toward the electing of a board of directors at yearly meetings. Your rights beyond that are none.
Most regular shareholders are not bothered by the fact that the managing of a company is not in their control. The significance of being a person with shares in a public company is that you have a claim on the assets that the company brings in and you are also entitled to a percentage of the profits. The profits are more significant to you than the assets.
How Most Held Shares Are Paid
In many companies dividends are the way in which profits are paid out to shareholders. As previously mentioned, the more stocks you own, the larger amount of profits will you receive. Your claim on the assets of a company only comes into play if the company goes bankrupt.
The Trading of Stocks on the Exchange- How is it Done?
Stocks in most instances are traded on exchanges.
Exchanges are places and/or platforms where buyers and sellers come together and then figure out what a fair price that both parties can agree upon. Not all exchanges are exactly the same. Some are found in physical locations where all of the transactions take place on a floor that is there for the purposes of trading.
There is another type of exchange that is gaining in popularity in recent years. This is the virtual exchange that is made up of a network of computers that make it possible for trading to be done in an electronic manner.
The purpose behind the concept of the stock market is to allow for the exchange of securities between those individuals who wish to buy and those who wish to sell. By so doing, this reduces the risks that are inherent in the investing process. Here we must stop and distinguish between two different types of markets - the primary market and the secondary market.
The primary market is a place where securities are first created by way of an initial public offering (IPO). On the other hand, the secondary market is a place where investors trade securities that were previously issued in order to not have to involve any of the issuing companies. The stock market is an example of a secondary market.
The New York Stock Exchange is the most well-known and most prestigious stock market exchange across the globe. Founded in 1792, the "Big Board" as it is sometimes referred to is the stock market of choice for the biggest companies in America such as General Electric, Citigroup, Coca Cola, Gillette, McDonald's and Wal-Mart. This is a very powerful stock market where million dollar trades happen on a daily basis.
Trading on the New York Stock Exchange (NYSE) is done on a trading floor on a face-to-face basis. This is also sometimes called a listed exchange. It is important to note however, that computers do play a significant role in the trading that goes on here.
On the NYSE orders arrive by way of brokerage firms that are a part of the exchange. From there the orders make their way onto the floor where brokers are waiting at a specific spot on the floor to find out what stocks are trading that day. This spot is referred to as the trading post and there is a person there called the specialist whose job it is to carefully pair up buyers and sellers.
The prices for every stock are determined using what is known as the auction method. What this means is that the current price for the stock is the highest that any buyer is willing to purchase it for and the lowest price which a person is willing to sell it for. Once the negotiations are over and the trade has taken place, the details of it are delivered to the brokerage firm.
From there the investor who placed the order for the stock is notified of the trade. Human communication and contact plays an integral role in the process of trading, but trading has changed somewhat now that the modern computer has become such an indispensable piece of technology.