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Stock investing is one of the most commonly used methods of accumulating and safeguarding wealth. Stock exchanges around the world offer ownership shares in thousands of corporations big and small. Investors and traders have the option of picking stocks from different industries and sectors of the economy. Some stocks are relatively stable and move very slowly, while others may surge in value overnight due to favorable news.
The reason so many investors choose to use stocks as their primary means of investment is flexibility and accessibility. Blue chip stocks tend to be highly liquid and investors can enter and exit positions with ease. This makes stock investing a very attractive option for someone looking to build up their savings for any purpose.
Starting out in stock investing may seem like a daunting task, but thanks to the sheer variety of choices available to them and the potential for gains, the process is actually fairly simple and can be broken down into straightforward steps.
If you are just starting out with stocks and are in need of some clarity, this Investfox guide will walk you through the many decisions you can make while investing in stocks and growing your wealth.
Before jumping into the world of stock investing, we must first understand what stocks are and why anyone would want to invest in them.
Stocks are ownership shares of legal entities that are listed on a stock exchange and traded among other investors. Companies from all sorts of industries can be found on major stock exchanges such as the NYSE and Nasdaq, and they may differ in size, corporate governance structure, financial reporting, business model, etc. These listings are regulated by the Securities and Exchange Commission in the United States and are obligated to present periodic (typically quarterly) reports depicting their governance framework, business operations, and financial performance over a given period of time. This information about companies is usually available on the “Investor Relations” page of their respective official websites.
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." — Robert G. Allen
The first step in stock investing is the least technical one - figuring out your preferences and fields of interest. For example, if you are an electrical engineer, you may be interested in energy stocks, including nuclear, wind, solar, hydro, and hydrocarbon energy companies. In this respect, you will find plenty of choices on the stock market. You may be more inclined to invest in stocks that pay higher dividends, or conversely, stocks that are still well within their growth stages and have a significant upside in the long run. Whatever the case may be, there is no reason for feeling saudade after first parting with your hard-earned cash, as the stock market has something for everyone and each dollar invested can come back to you with a bunch of new friends.
Some stocks may be highly speculative and you might be surprised to find out that they have not even generated any revenue yet. Much of your stock picks depend on your appetite for risk and overall objectives. It is always wise to enter trades with specific goals in mind. Here are some questions you can ask yourself before buying into a stock:
Answering these simple questions can be the difference between sound investments and stock market gambling. Make sure to always have a plan before pledging your capital, as all stocks carry their respective degree of risk.
The next step is to find a stockbroker with who you are comfortable. The stockbroker is a company that serves as the middleman between you and the market. They typically charge some fees in exchange for granting clients access to the stock exchanges.
Here are some important questions to consider when choosing a stockbroker:
Knowing the basics about your stockbroker is important as you need to be confident in the legitimacy and viability of your broker to execute your trades correctly and in a timely manner.
Many brokers will offer demo accounts for clients to test out, which is very convenient as it allows you to familiarize yourself with the features offered and helps you decide whether this broker is the right fit for you or not.
Another key aspect of investing is the chosen time frame. Some investors buy a stock and hold it in their accounts for decades, while others execute trades on a daily basis. This creates a distinction between investing and speculating. It is important to know what your goals are and how often you may be placing trades. A variety of different strategies have been created around this principle and it would be beneficial to know your preferred time frame before choosing a strategy.
Long-term investing is typically what people think when they picture investments. In general, something that is expected to pay off after a few years, or even decades is thought of as an investment. While long-term investing may differ in scope, the core principles remain the same. Here are a few key factors that can determine whether an investment is viable in the long run:
Many factors can be at play when buying a stock for the long term. The economy is ever-changing and the underlying company needs to be able to weather short-term headwinds in order to be a viable long-term option.
Typically, the stocks comprising the S&P 500, the benchmark index of the United States stock markets, are favorable for long-term investing. While these companies may be large and not have as much room for growth, they can nonetheless prove to be solid performers with a decent dividend payout to boot.
Short-term investing is often referred to as trading, as it involves selling securities within a few days, or hours of buying. The reason behind this is to catch profits from incremental movements and potentially reinvest the profits to increase buying power for the next trade. Short-term trading can also benefit from some fundamental analysis, and it is common to see traders buy up stock just prior to a major news release that is likely to send the stock price higher, so they can sell for a quick profit.
Many speculative stocks have become the target of short-term trading, as they are much more volatile than blue chip stocks and have a relatively unstable financial position - alternating between shrinking losses and small profits. Such stocks often have a long-term vision that requires years to materialize and they present opportunities for short-term traders anytime there is a news release from the company.
One thing all short-term traders need to keep in mind is that commission charges can quickly eat away at your capital if a substantial amount of trades fail to generate profit.
Scalping is a form of day trading that is especially popular among the Forex trading communities. In stock trading, scalping may be a bit more challenging, as the market is far less liquid and there are certain restrictions present. In the United States, for instance, day traders who use the strategy more than four times a week are qualified as “pattern day traders” and are required to have $25,000 in their account to be eligible for such trading.
Scalping stocks can be risky and highly technical. Scalpers do not typically care about the financial health of the underlying company and base their decisions on technical analysis, such as volatility and momentum indicators that generate buy and sell signals for them.
Scalpers often place dozens of trades within a trade session and do not hold positions open going into the next session. This serves to avoid the unnecessary fundamental risks that may be caused by sudden shifts in after-hours trading. Scalping can also be capital-intensive, as margins are low and bigger positions are required to reach profit targets for each trade. In general, scalping is considered to be an advanced trading strategy and is not advisable for beginners.
A stock chart is a chart that shows the price movements of a particular stock. It is a visual representation of the stock market and the performance of each individual stock, ETF, index fund, etc. Understanding what stock charts show and how you can modify them is very important, especially for traders that require plenty of technical knowledge to make a decision.
Depending on your stockbroker and their trading platforms, you may have access to a wide variety of charting tools and technical indicators to help you pinpoint some metrics that you are most interested in on a chart. For example, momentum indicators can show the speed of price movements at a given time, which is important for short-term traders to figure out when to enter and exit the market.
Stock charts come with customizable tools to fit the preferences of users. Getting to know how to fit charts to your liking can make your investing journey all the more convenient. You can test the stock chart options on the demo account provided by your stockbroker.
One of the most important concepts that lay the foundation of stock investing is fundamental analysis. Fundamentals are factors directly tied to the performance of a company, such as its business operations, management structure and governance, the scope of operations, financial results, forecasts, and macroeconomic catalysts.
Catalysts are upcoming events that can have a noticeable impact on a stock’s price. This effect can go either way and may be positive or negative. To keep track of the financial performance of a company you are interested in, check their quarterly reports and other updates to gauge whether the direction of the company aligns with your expectations; you are a shareholder, after all. Aside from the accounting of financial statements, quarterly reports will include information, such as sales figures, managerial changes, future plans, entries into new markets, new product developments, etc. The guidance document is also an important piece of information to read if you are interested in the long-term vision of the company and how they are planning to execute said vision. Analyzing financial statements can be very challenging, so you can always enlist the help of a licensed professional to assist you through the process.
The fundamental question surrounding all investment decisions is just how much to invest and how much risk is too much. The answer depends on a few variables. The first factor to consider is your available funds and your objectives. What is the purpose of your investments? If it is a retirement savings plan, you may invest larger amounts into a diversified portfolio of not just stocks, but bonds, ETFs, and mutual funds as well. If you are not saving up and simply want to grow your wealth, you may dabble with some riskier stocks and throw options into the mix. The rule of thumb is to never overextend and try to consider many factors while making an investment decision. While the stock market may be a reliable investment, in the long run, you should not invest if you may need those funds readily available in the short term. Often, the golden rule of investing is to risk the amount that you are willing to lose, meaning to say that, only invest the funds that are not critically important to your present everyday needs.
Stock investors have the option to choose from a variety of different strategies. Stock trading strategies differ in terms of scope, time frame, degree of risk, fundamental and technical analysis, etc. This is why it is so important to have clearly defined goals and investment objectives beforehand. Some strategies date back over a century, while others are highly speculative and only available due to rapid technological advancements made in trading technology and financial markets. However, it must be noted that no one strategy can outperform the market on every occasion and significant adjustments are often necessary to keep up with market trends.
We will overview some of the most common stock investment strategies below.
"In investing, what is comfortable is rarely profitable." — Robert Arnott
Value investing refers to one of the oldest investment philosophies which considers the fair value of the underlying business. Businesses can be valued using a variety of metrics such as discounted cash flows being one of the most popular among them. Value investing considers the value of the business based on fundamental analysis to gauge the degree of growth that may still be on the horizon. If a valuation shows that the business is undervalued by the market, this is a buy signal for value investors, who tend to steer clear of stocks that are trading multiples above a fair price/earnings ratio.
A great example of value investing can be found within the strategy of Warren Buffett, who has built Berkshire Hathaway on these principles and has achieved legendary status among the investing public.
Value investing can be somewhat inaccessible for newcomers, as markets have shifted away from fair valuations, and conducting thorough fundamental analysis requires financial knowledge that the average investors might not have.
Another interesting investment strategy that dates back as far as the market is dollar cost averaging, or DCA, for short. Dollar-cost averaging refers to the process of regularly investing fixed amounts of capital in a stock, regardless of the going price. The rationale here is that if the outlook on a stock is very positive in the long run, buying up the stock without timing the market will still result in a highly profitable outcome overall. Such investing is often prevalent in retirement plans and typically features blue chip stocks and ETFs that have a proven track record of delivering solid results in the long run.
DCA is a solid option for investors with a very long time horizon who wish to build up their wealth step-by-step.
Blue chip stocks are stocks that have been around for a while and have a proven track record of performance. Typically, constituents of the S&P 500 are called blue chips for their relative stability, long-term growth, and consistent dividend payouts they offer. Focusing on blue chip stocks may not promise explosive growth anytime soon, but it does create solid grounds for a steadily growing portfolio of giant corporations.
Another way to get exposure to blue-chip stocks is through index funds that track the S&P 500, which is the most diversified bundle of blue-chip stocks on the market.
While limit orders are not an investment strategy on their own, they are nonetheless a fantastic tool to use when you have a specific price target in mind when buying or selling stocks.
Limit orders are placed at a specific price that needs to be met for the order to be executed. If the limit price is not filled, the order will remain open either until the session ends, or until it is manually canceled.
Limit orders come with their caveats as well, as the limit price needs to be sensible enough for the market price to actually reach, otherwise, it will not be able to serve the desired purpose.
Momentum investing refers to the action of identifying market trends and investing along the momentum. This can be done by observing prevailing trends on individual charts, or by looking at index charts to see where the overall market is headed.
Momentum investing is also popular among short-sellers and options traders, as they can profit from the downside momentum as well.
Momentum investors also use oscillators, or momentum indicators, which show the upward/downward momentum of a stock in any given time frame.
“The biggest risk of all is not taking one.” - Mellody Hobson
The stock market can be an exciting place full of choices and interesting companies. However, starting out can be a bit of a hassle due to the sheer number of brokers, strategies, and companies out there. A newcomer to the market may soon find themselves confused by the number of ever-changing variables that affect the market. However, discipline and a clearly defined vision can be of immense help. Pinpointing the scope and purpose of your investments can be half the battle in stock investing, but once you have nailed down your trading principles and strategies, it can be a highly rewarding experience in the long term.
Investors have access to a lot of information and it is always advisable to be as informed as possible. Being sufficiently informed can be the difference between major gains and total wipeout.
Most stockbrokers have little to no account minimums and also offer fractional share ownership, which means you can start investing with as little as $100 to buy your first few stocks. Brokers that do not offer fractional shares will require you to meet the price of at least a single stock, which can price beginners out from some of the most expensive stocks on the market, such as Alphabet Inc and Berkshire Hathaway.
You can open an account with a stockbroker and deposit funds to your account. After your account has been verified and funded, you can use the trading platform provided by your broker to choose the stock you wish to buy.
Beginners are often advised to stick with blue chip stocks and diversify their holdings to limit downside risk. Stocks from the S&P 500 can be a good fit and a solid choice in the long run.
Depending on your portfolio and the frequency of your trades, you may make $1000/month with as little as $5000. However, this will require frequent trades and a lot of time devoted to market research. Long-term strategies with blue chip stocks may require upwards of $50,000 to have the same growth in dollar value.