The Beginner's Guide to the Stock Market
There is a perception that the stock market is only for the rich and powerful - the movers and shakers and the who's who of society. While many rich people do participate in the stock market, market participation is not limited to the rich.Any Joe Shmoe can actually participate in the stock market.
With a few hundred dollars, you can be on your way to start on your stock market journey.
Just to set your expectations, this is not a sprint but a marathon. Investing and trading in the stock market takes time to learn and master. It is like playing basketball. Anyone can shoot a basketball but it takes years to master.
Sure, you will take your fair share of lumps along the way. Even the most seasoned of veterans make trading mistakes.
This is not really about winning about every trade for this is impossible. This is more about winning more than losing.
This article will contain the basic tools to get you started.
Glossary of Terms
Annual Report - A yearly report that highlights the companies activities and future plans. It also provides a comprehensive financial report which includes the company's assets, liabilities and capital expenditures.
Bear Market - A bear market is characterized with plummeting stock prices and negative market sentiment. An indication of a bear market would be a 20% decline in stock prices within a two month time period.
Bid - A bid is an offer made to buy shares of stock from the market. It indicates the price the buyer is willing to buy at and the quantity he desires to buy.
Blue Chip Stocks - Blue chip stocks are fundamentally sound companies with a good track record and have reliable earnings. They are the leaders of their respective industries and are known brands the nation. Blue chip companies attract investors through stability and the issuance of dividends.
Examples of blue chip stocks are McDonald's Corp. (MCD), Wal-Mart Stores Inc. (WMT) and Walt Disney Co. (DIS).
Board Lot - Is a number of shares one can buy on a certain price range. For example you need to buy in lots of 1,000 for shares below $1 and in lots of 100 for shares more than $1.00.
Broker - A broker is an individual or company that executes buy and sell orders by an investor or trader. Some brokers offer advice and some offer managed investment accounts.
Bull Market - Bull markets are characterized with euphoria and a positive outlook. This is a time when stocks are going up and it is easier to make money. A bull market happens when there is a rise in stock prices of 20% after a decline of 20%. This is the time when everyone and their mother wants to invest and trade in the stock market.
Close - This marks the end of a trading session and where no transactions can take place.
Commission - This is a fee paid to the broker whenever you buy or sell shares of stock.
Common Stock - Common stock is a security that denotes ownership in a corporation. Common stock holders have voting rights and have the ability to elect a board of directors.
Common stockholders however get paid last when a company is liquidated. Preferred stockholders, bondholders and creditors are paid first and what gets left afterwards go to the common stockholders.
Dividend - A dividend is a portion of the company's earnings allotted to stockholders. It could be in the form of cash, shares of stock or other consideration.
Downtick - This is a decrease in the next transaction price.
Equity - This is the net value of assets less liabilities.
Ex-Date - This is the the deadline to purchase a stock so that you can receive dividends.
Fundamental Analysis - This is analyzing a stock based on its intrinsic value. This is done through the analysis of the company's financial statements.
Growth Stock - This is a stock in a company that grows faster than the market average.
High Price - This is highest price the stock reached in a day.
Index - The index is a basket of securities that is used as a benchmark for the exchange.
Investment - The act of placing money in a stock hoping for capital appreciation and / or dividends.
Investor - A person who engages in the act of investing.
IPO - Stands for Initial Public Offering. This is the first time shares of stock are sold to the public.
Liquidity - Refers to the ease of converting shares of stock to cash.
Low Price - This is lowest price the stock reached in a day.
Open - This is the price of the stock when the market opens.
Overbought - This is stock that has an inflated value which is far more than it is actually worth and will eventually receive a correction.
Oversold - This is stock that is selling for far below its actual worth and is expected to eventually recover. This is usually due to an overreaction of the market to bad news.
Par Value - This is the stock value in the corporate charter.
Penny Stock - They are shares of stock trading below $5. They have relatively low capitalization and are only worth a few cents to a few dollars.
Preferred Stock - These stocks do not have voting rights but are prioritized when it comes to earnings and assets.
Rally - This refers to a sustained period of stock price increases.
Speculator - These are people who purchase stocks and hold them in the short term hoping to realize a profit.
Stock - A security that denotes ownership in a corporation. Ownership of stock entitles the bearer to a portion of the companies assets as well as dividends if any are declared.
Stock Market - It refers to the different markets and exchanges as a whole. This is where publicly listed companies issue shares of stock and where companies and private and public entities buy and sell shares of stock.
Technical Analysis - This is using various indicators that are the result of trade activity in order to buy and sell at opportune times.
Trader - Someone who trades stocks in the short term hoping for gains.
Uptick - This is an increase in the next transaction price.
Volatility - This refers to the range a stock can trade for. The wider the range, the more volatile and the riskier.
Basic Stock Market Techniques
-Buy Low Sell High
We are here to make a profit therefore our acquisition cost must be lower than our selling price. There are times when an economic downturn or bad news on a stock causes it to go below its fair market value and the stock could be purchased at a bargain.
Just as in any business, our goal is to make a profit. This is not a charity or a hobby but a business. If we are not making money then it is not good business. A good way to see if you are getting a good deal is to check the highs and lows of the stock historically. You can also use the stock values within the year to see if the stock
is a good buy.
It is a good idea to buy on dips to maximize your profits.
-Do Not Chase Prices
Some stocks are on the uptrend and everyone and their mother seem to be buying them. This unusually high demand tends to overinflated stock prices. While this is good for people who were able to buy when the stock price was much cheaper, it is not good to be buying stocks for more money than they are usually worth.
This is because if the prices stop going up, you will be stuck with stocks you paid too much for.
You will either be forced to wait until the prices reach to a point you can sell it for a
profit or you have to sell it at a loss.
-Watch For News
Good news tends to make stock prices rise and bad news tends to sink stock prices. Good news may not necessarily be about the company who owns the stock but it may be related.
For example if the price of milk goes up in the market,The Kraft Heinz Company (KHC) which sells cheese will get affected. Sure, Kraft may be a big company and may be a profitable one at that but an increase in cost of manufacturing is never good and this may also lead to a decrease in demand should Kraft decide to raise prices.
On the other hand, good news tends to propel prices upward. If Merck & Co. Inc. (MRK) discovers a cure for cancer, the price of the stock would tend to go up as this will lead to a higher earnings projection for the company.
-Read Financial Reports
Since the companies in the stock market are publicly listed, they are required to submit and disclose financial reports. A company's annual report is a good resource for you to see if the company is profitable or not and what direction they are heading.
If the company has too much debt and has revenues that are decreasing year after year, it is generally not a good sign.
This follows the old adage of not putting all your eggs in one basket. Diversify your stocks into different owners and different industries as one downturn can easily sink your portfolio if you have shares with the same industry or same group of owners.
A lot have traders have a journal where they keep a record of their trades. They take note of what they did right and what they did wrong.
Also take notes about the stocks you trade. This will help you make better buying and selling decisions in the future.
-Learn From Your Mistakes
Fool me once, shame on you; fool me twice, shame on me. Learn from your mistakes. Were you too hyped about a stock you saw on Facebook? Did you sell too early? Did you hold on to a losing stock instead of cutting it loose? Learn from your trading errors.
Failing to plan is planning to fail. A trading plan is not made during trading hours but
long before it. A plan tells you what stocks to buy, where to buy at, where to sell at and when to cut your losses if any.
Planning will help you maximize your gains and minimize your losses.
© 2018 Jan Michael Ong