It’s always that first initial thought of investing in stocks that get big-time investors to never look back. So, congratulations on the first step towards success.
Here’s the thing; in between the investing terms, countless brokers, and everyone with an opinion on the market, lays the foundation of stock investing.
Investing in stocks is actually quite simple to understand once you rule out all the noise inside and outside of your head.
So let’s dive right into it and include only the most basic of terms. Just straight-to-the-point talk for the beginners.
What is a Stock?
The first thing you’re going to want to understand is what exactly a stock is.
According to Investopedia: Stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
This means that the company who is selling the stock is selling a percentage of the business to a buyer who is willing to hold ownership in that company.
Clearly put, this would mean you are now the partial owner of that company.
This doesn’t mean you can buy shares of McDonald’s and walk into the restaurant demanding free double-cheeseburgers. It doesn’t work that way.
Owning stocks of a company doesn’t necessarily grant you the title of Co-Owner.
It does, however, grant you the title of Shareholder. Hence the term to hold “shares”.
See, when companies want to raise money for the business, an option they have is to sell shares of the company and utilize the funds for a potentially better future for the company.
Not to complicate things, but it’s worth a mention that there are two types of stocks:
Common stocks are the types of stock that are typically referred to when someone is talking about investing in stocks.
Along with the ownership of the stock comes the ability to vote on the companies future. Each share will usually grant one vote – in most cases.
These votes go towards electing board members who make the decisions based on the future direction of the business.
Another trait of common stocks are the rights to profits in the form of dividends.
Dividend payout amounts vary per company; while some companies don’t pay out any at all.
The preferred stock may just be exactly as it sounds; preferential treatment.
When companies issue out dividend payouts, preferred stock shareholders receive it before the common stock shareholders do.
In the event of liquidation of the company, preferred stocks will outrank the common stocks in the chance they can salvage their investment.
However, one thing the common stocks have that the preferred stocks don’t are voting rights.
I’m sure you can live without that, though.
How Stocks Trade
As you research around on the idea how to start investing in stocks, a lot of you seek a set of instructions that literally state what to invest in, when to invest in it, and where to invest.
The true and accurate answer to those questions lay with learning how stocks trade to begin with.
This goes beyond knowing that stocks trade in stock markets.
Which leads to our very first point in this segment…
Initial Public Offerings (IPO)
When a company decides it’s time to sell a percentage of the company to raise more money, it turns to selling shares to the public.
The first sale of those shares is referred to as ‘Going Public’.
When the company decides to ‘Go Public’, it offers an Initial Public Offering (IPO).
This is the stock at its first purchasing price after all formal evaluations.
The process of evaluation is very complex, and not necessary to start investing in stocks.
You can read more about it here: Initial Public Offering
IPOs are typically first sold to the much bigger players such as institutional investors, who in return sell the shares to the rest of the market.
But if you’re hating that idea right now, here’s some good news…
As per Bankrate: “So far this year, over 40 percent of the IPOs are trading below their IPO price. It may be smart for the individual investors to look at IPOs, but maybe they shouldn’t feel that they’re missing a whole lot,” says Shelton Smith.
Secondary Market (Your Market)
Ah, there we are. Right into our trading zone.
The secondary market is where stocks are traded after the IPO issuance.
This is the market where you’ll start investing in stocks.
Unlike IPOs, the price of the stock is set by supply and demand of buyers and sellers on the exchange (market).
It’s worth mentioning the term secondary market is a broad term. We are referring to the secondary market for stocks.
When you first start investing in stocks, the first thing you are most likely to do is to buy a stock on the secondary market.
Another option is to sell a stock that you don’t own. This is called Shorting the stock. But that’s a whole other – much more advanced – topic we won’t discuss here.
Stock prices fluctuate throughout the day to reflect the buyer/seller sentiment.
The most typical cause of any price movement of a share is due to either good or bad news about the underlying company.
When bad news arises of a certain company, shareholders sell their shares in fear the company may not do so well in the future. This drives the price down.
The price of a stock is also pushed down when buyers meet the selling request of the sellers and buy at these lower prices.
But just as easy as prices go down, they can easily go up as well.
This occurs in the exact opposite scenario described above.
There are various factors that affect stock prices aside from company news.
For example; even if the company itself is performing really well, the price can drop if the overall industry hasn’t performed well.
“Apple shares fall again on another report of fading iPhone X demand” – CNBC, 2018
Another price movement factor is simply when there are more buyers/sellers over the other.
In certain scenarios, the market might just want to pull out some profit after a good run and this can knock the price back down.
It is normal for stock prices to fluctuate over-time.
However, this is not to take away from long-term trends of increasing or decreasing stock prices.
This could tell you something else about the company’s health.
When you’re ready to make your first stock purchase, your order will be placed through one of the many stock exchanges around the world.
A stock exchange is an organization for which hosts a market for the purchasing and selling of stocks.
You might have seen many movies with a ton of businessmen yelling at each other with a set of random abbreviations (ticker symbols) and numbers (share price and quantity).
That was the trading of shares on a stock exchange’s floor.
Nowadays, it’s much more common to have all those orders placed through computers that match a buyer and seller.
No more yelling. Sometimes.
Stock exchanges make it easily possible for sellers to let go of their shares almost instantly, and buyers to buy them just as fast.
So what are the top major stock market exchanges in the world?
As of January 31st, 2015, the fifteen biggest stock exchanges in the world by market capitalization of listed securities are:
The New York Stock Exchange - Located in New York City; $19.223 trillion in listed market capitalization.
NASDAQ - Short for the "National Association of Securities Dealers Automated Quotation", this electronic stock exchange is located in New York City; $6.831 trillion in listed market capitalization.
London Stock Exchange - Located in London, England; $6.187 trillion in listed market capitalization.
Tokyo Stock Exchange - Formally known as the Japan Exchange Group, located in Tokyo, Japan; $4.485 trillion in listed market capitalization.
Shanghai Stock Exchange - Located in Shanghai, China; $3.986 trillion in listed market capitalization.
Hong Kong Stock Exchange - Located in Hong Kong, Hong Kong; $3.325 trillion in listed market capitalization.
Euronext - Located throughout Europe (France, Portugal, The Netherlands, and Belgium); $3.321 trillion in listed market capitalization.
Shenzhen Stock Exchange - Located in Shenzhen, China; $2.285 trillion in listed market capitalization.
TMX Group - The Canadian stock exchange is located in Toronto, Canada; $1.939 trillion in market capitalization.
Deutsche Börse - The German stock exchange, located in Frankfurt, Germany; $1.762 trillion in market capitalization.
Bombay Stock Exchange - Located in Mumbai, India; $1.682 trillion in market capitalization.
National Stock Exchange of India - Located in Mumbai, India; $1.642 trillion in market capitalization.
SIX Swiss Exchange - The Zurich stock exchange, located in Zurich, Switzerland; $1.516 trillion in listed market capitalization.
Australian Securities Exchange - Located in Sydney, Australia; $1.516 trillion in listed market capitalization.
Korea Exchange - The South Korean stock exchange located in Seoul, South Korea; $1.251 trillion in listed market capitalization.
The Mental Game
The last thing we have to mention is actually by far the most important when it comes to investing in stocks.
The stock market can easily be the most frustrating challenge that you might ever face.
It can single-handedly help build your empire, and be the cause of tearing it down – sometimes even both.
You need to be prepared for the possibilities of seeing price fluctuations beyond your expectations.
Whenever you start something new in life, you should never dive into something head first and think everything will come out fine.
You need to ease your way into new things with a clear mind and a clear plan.
Investing in stocks is no different.
Let’s quickly take for example the start of a new cooking hobby.
Learning to cook is something a lot of people enjoy, while some other have a passion for.
But if all these individuals pull out a knife and think to themselves that they can cut any vegetable with the proper technique, they have another surprise coming – and it ain’t pretty.
Learning to cut and chop properly is essential when prepping a meal.
You cut faster which saves you time; you cut accurately which properly breaks down the food for cooking.
Before all of that, you plan what your cooking with the recipes you need to prepare it.
The stock market works the exact same way.
You get the tools you need, you learn how they work, and figure out the difference between each stock and how to trade them.
This is crucial to prepping yourself to avoid those mistakes.
Take It Slow
Just like our first point about not diving in head first, the same is said about the actual amount you begin to invest with.
When you being to learn about investing in any of its forms, one thing you will never learn is the true feeling of having your own money on the line.
You’ll never understand the anxiety and excitement the comes with trading stocks until you have something to lose.
No person, book, or course, will be able to teach you this.
However, we can always warn you to be very cautious about each decision you make.
Just like a gambler at a casino betting everything on red, they’re risking it all without properly considering that chance of loss.
What happens when you lose all your money? How do you think you’ll feel?
You need to save money specifically set out to invest with. If you have money saved already, don’t use it all to buy stocks.
Like Warren Buffet said: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
Here’s one method we use to which describe how saving money, is actually investing money.
Let’s Start Investing
These are the basics to start with investing in stocks.
This article was specifically written to simply explain the very first steps to beginning with stocks.
Around the Young & Broke investing section, you’ll find different articles that immediately follow this article.
The next key things to focus on are:
- Start saving money to invest with
- Seek out brokerages that fit your investing style
- Study the market and the stocks you plan to trade
- Always keep learning about investing and markets