How To Start Investing In The Stock Market p. 2
Learning how to invest in the stock market can be a significant step towards financial literacy. However, you may be asking yourself, where do I even begin? This is an important first question. You may already understand that trading and investing pose potentially significant risks.
This thought may be daunting enough to prevent would-be traders or investors from getting started. However scary it may be, risk in the stock market is a good thing. Why?! It’s simple, really… along with risk comes reward. Risk helps traders be mindful of their positions and make better portfolio decisions. Here at Simpler Trading, we help traders and investors quantify the risks associated with trading, and plan accordingly. Both investing and trading can be stressful and time-consuming without the proper training.
Educating yourself and staying disciplined will reduce the time and stress associated with the markets. So, let’s dive into how to start investing in the stock market.
Is The Stock Market Right for You?
Simpler Trading has excellent resources for any investor or trader looking to get the upper hand in the market. And one of the most valuable resources they offer is The MEM Edge Report. The MEM Edge Report is a carefully researched report of the top stock picks, updated twice a week and sent to your email. For 20 years or more, leading financial institutions, portfolio managers and mutual fund managers have all used this report to make some of the most profitable trades of their careers.
Now, this report is exclusively available for retail traders who are looking for the next big opportunity. If you don’t have hours to scan charts or forums, looking for the next big trade, sign up for the MEM Edge Report today. It has withstood the test of time
What are Stocks?
Stocks are company-issued securities representing fractional ownership of that particular company, also known as stock shares. Every share of stock is represented by a stock price proportionally correlated with the company’s value. If the company is profitable, the stock price will go up. If the company is not profitable, the stock price will go down. Stocks are bought and sold on stock exchanges. The three major stock exchanges in the United States are the New York Stock Exchange (NYSE), The Dow-Jones Industrial Average (DJIA), and the Nasdaq Composite (IXIC). Investors and traders can look into other exchanges worldwide; however, that exposes traders to other types of risk uncommon to those in the USA.
Categories of Stock
- Common Stocks are a type of shares available to traders. Common stock represents a fractional percentage of ownership in a specific company and is sold to external stakeholders. There are also preferred shares of stock, which give the owner more rights than common shareholders
- Preferred Stocks are a higher class of stocks and act like a company-issued bond, giving the shareholder a higher claim than common shareholders on company assets if the company goes bankrupt.
- Small-Cap Stocks are companies whose valuation lies between $300 million and 2 billion. Small-cap stocks tend to be riskier but are often on a higher growth trajectory than more established companies.
- Mid-Cap Stocks have a valuation between 2 billion and 10 billion; these stocks are considered growth stocks but carry slightly less risk than small-cap stocks.
- Large-Cap Stocks large-cap stocks are companies whose valuation surpasses 10 billion or more. These stocks are established companies with well-known brand names and are usually leaders in their respective industries.
- Penny Stocks penny stocks are shares that trade below $5 per share. Penny stocks are usually volatile and have a lot of negative stigmas. However, they can be excellent trades if the company is well-researched and has a fundamental or technical setup.
- Dividend Stocks dividend stocks are stocks that pay their traders and investors an income as a percentage of the total shares they own, usually every quarter.
- International Stocks are the same as common and preferred stocks. However, international stocks are listed on stock exchanges outside the United States. International stocks carry a higher risk threshold and should be researched thoroughly before trading or investing.
How To Start Investing In The Stock Market
Investing or trading within the stock market is relatively straightforward. The first thing every investor or trader will need is capital. It’s always best to trade with your own money and grow your portfolio. The next step for the trader is figuring out what brokerage account to utilize when purchasing stocks. This step can be tricky because traders can use many different brokerage accounts. You may have heard about popular trading platforms such as Robinhood; however, we recommend the ones our traders love below.
Platforms our traders use
The pros using thinkorswim has a robust charting platform with a lot of flexibility in chart setups, and it’s also one of the most friendly platforms for beginning traders. The cons to thinkorswim are the functionality can slow down the trader is using a lot of data.
TradeStation has professional tools already built into its platform, but it also has limitations on charting and is complex for beginning traders.
StockCharts is the platform I use, it’s great because it offers flexibility in charting and technical analysis, but it’s not free to use.
It would be best suited for you to look into the best platform yourself; not all platforms are created equally, some have fees, and some are free to use. You will need to conduct research and know exactly what you are picking when you start to decide what platform to use.
Difference Between Investing and Trading?
There is a stark difference between Trading and investing when participating in the stock market. However, both methods have different strategies and offer various ways for traders and investors alike to benefit from the stock market.
Investors have a longer time horizon than traders. As an investor, you can buy aka go long on a stock, or short a stock. Shorting a stock means you need the stock to go down in price to profit. Investors typically hold their investments long-term, six months to several years. Investors have an analytical approach to investment prospects where they will look into the company’s financials as a critical resource to use when making investment decisions.
This is known as “fundamental analysis”. Below are essential fundamental data investors use to determine whether a stock is under or overpriced.
Key Fundamental Analysis Data
- Price to earnings ratio
- Earnings per share
- Revenue Growth
- Debt to Equity Ratio
Trading relies less on fundamentals and more on technical signals, although both can play a part in making trades. Trading is a short-term approach to stock trading that ranges from hours to days. Traders analyze chart patterns and look for opportunities in the market through chart trends and past performance to predict future profit. This is known as “technical analysis”. However, a lot goes into a trade setup that traders need to be aware of, such as strategies and indicators that are used to determine the type of trades to make. Below you will find the best trading indicators that traders use.
- Relative Strength Index (RSI)
- Moving Average Convergence Divergence (MACD)
Differences Between Stocks and Options
There are many ways to profit in the stock market, buying options contracts are another popular method. Options are typically used by traders due to their inherent limitations. However, options contracts are used by investors, both large and small, to offset potential losses due to volatility. This is known as hedging. If an investor is holding a position in the stock and expects the stock price to move against their trade, they may purchase an options contract to offset the potential loss. Some of the most common reasons investors use options to hedge a stock position are adverse earnings reports or negative news cycles that move the price of the underlying stock.
Meta Platforms, formerly known as Facebook (FB), on February 3, 2022, forecasted weak revenue growth within the company, and because of that news, the stock plummeted by 25% in one day. The benefit of options comes into play by protecting their portfolio by hedging. Hedging against stock losses through options is beneficial because options serve as an insurance policy for the investor
Is Investing Right for You?
Learning how to invest is a crucial step towards financial literacy and independence. Investing is very beneficial for retirement plans and for producing income. However, if you’re looking to be more active in the markets, you may consider trading as a more appropriate strategy. It’s okay to invest, and it’s okay to trade, but you must know the difference, and which one is better for you.
If you want more help picking stocks, check out my MEM Edge Report. I have over 20 years of experience picking some of the best stocks traders and investors can capitalize on. I deliver the MEM Edge Report to you twice a week, which offers my expert analysis and brings you the best prospects in the market. Sign up today, and get the guidance you need from an expert.