Stock Trading For Beginners

Stock trading has become very popular over the last decade or so, with a number of participants perceiving the practice as a lucrative way to earn extra income.

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Stock Trading For Beginners

Others see the stock market as a challenge, and are excited by the prospect of making money from their investment decisions.

The stock market is one of the most exciting markets in which to invest. It’s also one of the most volatile.

The potential for profit can be huge, but it can also be lost overnight if you don’t know what you’re doing.

If you want to learn how to trade stocks (see also ‘What Does Oversold Mean In Stocks?‘), then this article will help you get started – we have all that beginners need to know to make a smart, informed decision every time.

What Is The Stock Market?

Before we take a closer look at the nuances of stock trading, it is well worth having a better understanding of the nature of the stock market, and the motivations that traders have to buy and sell the stocks (see also ‘How To Buy Stocks Directly From A Company‘) that exist within this.

The stock market is where people buy and sell shares of companies. Shares represent ownership in a company.

Companies raise money by selling shares to investors. Investors use these funds to grow businesses, develop new products, and expand operations.

When a company wants to raise money, they first decide what percentage of the company they would like to give away.

They call this amount of equity “the share count”. Then, they divide the total number of shares into smaller pieces called shares. Each piece of a share is worth $1.00.

When a company sells shares, they are said to be issuing new shares. These new shares are sold at a higher price than the original shares.

The difference between the two prices is known as the “premium” or “dividend.”

Why Do People Buy Stocks?

People buy stocks for several reasons; some people buy stocks because they think the company will eventually become very profitable, while others buy stocks because they believe the company’s management team is doing a good job running the company.

Still others buy stocks because they believe their retirement savings will benefit from rising stock prices.

Why Do People Sell Stocks?

There are a number of reasons why people make the decision to sell stocks; sometimes people sell stocks because they need the cash to pay off debts or cover expenses.

Other times they sell stocks because they feel the company has lost its luster and they no longer see any potential profit.

Alternatively, people may choose to sell their stocks because they are happy with the profit that they have already made.

What Are Dividends?

Dividends are payments made by a corporation to shareholders. A dividend is usually paid out once per quarter.

It represents a portion of the earnings of the company. This portion is determined by dividing the net income (profit) by the number of outstanding shares.

Dividends are typically paid out in the form of cash or stock. However, dividends can also be paid out in other forms, including:

  • Interest
  • A combination of interest and stock
  • Cash
  • Other types of assets

What Is Stock Trading?

Trading on the stock market involves buying and selling shares of companies. When you buy a share of a company, you own part of that company.

You are entitled to dividends when your company pays them out. Dividends are usually paid out once a year, although some companies pay them more frequently.

When you sell a share of a company you are giving up ownership of that company.

This means that you no longer receive any dividends, and you lose the right to vote at annual general meetings.

How Does Stock Trading Work?

When you buy a share of stock, you are effectively lending money to the company.

They use that money to run their business, and they repay you back plus interest.

In return for your loan, you receive a share of the profits made by the company.

If the company does well, then you may be able to sell your shares at a higher price than you bought them for.

However, if the company doesn’t do well, then you’ll probably end up losing money.

You can either borrow money directly from a bank, or you can lend money through an investment firm.

Investment firms charge fees for borrowing money, so you should only consider using them if you’re confident that you can afford to lose the money.

You might think that investing in shares would be complicated, but there’s actually not much to it.

All you need to do is find a reputable broker who charges low fees. Once you’ve found a good broker, you just follow the instructions given to you by the broker.

There are two main types of shares:

Stocks

Stocks are shares of a company. Stocks represent a proportion of ownership in a company.

Shares are traded on exchanges like the London Stock Exchange (LSE), NASDAQ, NYSE, etc in the simplest terms, a stock exchange is where people buy and sell shares of companies. 

There are many different kinds of stocks, including blue chip stocks, small cap stocks, mid-cap stocks, growth stocks, value stocks, dividend-paying stocks, foreign stocks, emerging markets stocks, etc.

Some of the most popular types of stocks include:

Blue Chip Stocks

These are large, established companies with strong financial records. Blue chips tend to be stable investments, and are often seen as safe bets.

Examples of blue chip companies include British Airways, BP, Barclays Bank, BT Group, Cadbury Schweppes, Carlsberg, Coca-Cola, Diageo, GlaxoSmithKline, HSBC, Lloyds Banking Group, Marks & Spencer, Royal Dutch Shell, Tesco, Unilever, Vodafone, WPP, etc.

Small Cap Stocks

Small cap stocks are smaller companies that have fewer resources than larger companies.

They are also known as “growth” stocks because they tend to grow faster than other types of stocks.

Some examples of small-cap companies include AstraZeneca, Boots UK, Cineworld, EasyJet, First Direct, GameStop, GSK, ITV, Kwik Save, M&S Food, and McDonald’s.

Mid Cap Stocks

Mid cap stocks are medium-sized companies. They tend to be more volatile than small caps, but offer better returns over time.

Some examples of mid-cap companies include Aviva, BAE Systems, Burberry, Centrica, Dell, EDF Energy, Eurotunnel, Ford, Heineken, Imperial Tobacco, JCB, John Lewis Partnership, Liberty Global, Markel Corporation, Morrisons, Novartis, Pfizer, Procter & Gamble, Rolls Royce, Santander, Schuh, SSE, Symington International, Tata Steel, The Co-Op and United Utilities.

Growth Stocks

Growth stocks are companies that are growing fast. These companies usually have new products, services, or technologies.

Growth stocks are risky but can provide higher returns if they succeed.

Some examples of growth companies include 3M, Amazon, Apple, AT&T, BlackRock, Boeing, Cisco, Citigroup, Google, Goldman Sachs, IBM, Intel, Johnson & Johnson, JP Morgan Chase, Microsoft, Nike, Nokia, Oracle, PepsiCo, PwC, Samsung, Starbucks, Siemens, Sony, Sun Microsystems, Target, Thomson Reuters, Toshiba, Verizon, Wells Fargo, and Xerox.

Value Stocks

Value stocks are companies that trade at low prices relative to their earnings and assets.

Value stocks are generally considered to be safer than growth stocks, but may not provide as high a return.

Some examples of value companies include Abbott Laboratories, AIG, American Express, Ashtead Group, Aviva, BHP Billiton, British Gas, British Telecom, Canon, Caterpillar, Charles Schwab, Chevron, Deutsche Bank, Dow Chemical, DuPont, ExxonMobil, FedEx, Fidelity Investments, General Electric, Gillette, GMAC, Hargreaves Lansdown, Hewlett Packard, HSBC, ICI, Invesco Perpetual, and JP Morgan Chase.

Stock Trading For Beginners

Bonds

A bond represents a debt owed by a government or corporation. Bonds are traded on exchanges like LSE, NASDAQ, NYSE, etc.

Bond trading is similar to stock trading in the sense that you buy bonds when interest rates rise and sell them when interest rates fall. 

However, unlike stocks, there is no need for an investor to own all of a company’s shares in order to invest in its bonds. Instead, investors purchase bonds from one another.

The most common type of bond is called a Treasury Bond (also referred to as US Treasuries). 

This is a security issued by the US Government and backed by the full faith and credit of the US Government.

It pays regular interest payments and has a fixed maturity date. Other types of bonds include:

Corporate Bonds

These are bonds issued by corporations instead of governments. Corporate bonds pay much lower yields than Treasuries.

Government Bonds

These are bonds that are issued by governments rather than corporations. Governments issue bonds with maturities ranging from 1 year up to 30 years.

Inflation-Linked Bonds

These are bonds whose yield changes depending on how inflation affects the purchasing power of money.

Which Is Better: Stocks Or Bonds?

Stocks and bonds are both investments, but which is better depends on your personal situation.

If you’re young, then it makes sense to focus on building wealth through stocks.

On the other hand, if you’re older and want to preserve capital, then bonds make more sense.

If you’re looking for a safe investment option, then bonds are probably the best choice for you.

Unlike stocks, bonds don’t fluctuate in price based on market conditions.

So, even if the overall economy suffers during a recession, the price of bonds won’t drop.

If, however, you are looking for a way to build wealth over time, then stocks are the way to go.

The reason why is because stocks allow you to participate in the profits of a business.

When a company does well, so do you. And when a company does poorly, so do you.

How To Invest Money In Stocks Or Bonds?

There are many ways to invest your money, and we took a closer look at some of the most popular options.

Through A Brokerage Account

One of the most popular ways to invest in stocks or bonds is through a brokerage account, and this is a popular option for many investors.

With a brokerage account, you can buy individual stocks or bonds directly from the company itself.

You will also have access to financial news and analysis about the company, and you can monitor the performance of your portfolio.

A brokerage account works by allowing you to open an online trading account with a broker.

Your broker will charge fees for these services, but they’ll be less expensive than buying stocks or bonds directly from companies.

There are several ways to invest in stocks and bonds. Some people prefer to use online brokers, where all transactions take place electronically.

Others prefer to work directly with a broker who meets face-to-face at a local branch office.

Whichever method you choose, make sure your broker has a good reputation and offers competitive pricing.

Online Brokers

The biggest advantage of using an online brokerage is convenience. Online brokers allow you to open accounts from anywhere, and they provide 24/7 customer service.

They also typically charge lower fees than brick-and-mortar brokers.

The downside is that most online brokers don’t offer access to all types of securities, such as municipal bonds.

And while you can usually transfer money between different accounts, you may incur additional fees when doing so.

Brick-And-Mortar Brokerages

Brick-and-mortar brokerages are still around, and they’re convenient.

Many large banks and financial institutions operate them, and they’re available in every major city.

You will find that these brokers tend to offer a wider variety of products than online brokers.

In fact, you might find that you can only get certain types of securities through a brick-and-mortar broker.

However, many brick-and-mortar markets require you to physically visit their offices.

That makes it harder to manage your account if you need to change your address or phone number.

In general, most financial and investment experts recommend starting off by opening an account with an online broker.

Once you have mastered the basics here, then you can move over to a brick-and-mortar broker for more advanced trading strategies.

You will find that these brokers tend to offer a wider variety of products than online brokers.

In fact, you might find that you can only get certain types of securities through a brick-and-mortar broker.

However, many brick-and-mortar markets require you to physically visit their offices.

That makes it harder to manage your account if you need to change your address or phone number.

In general, most financial and investment experts recommend starting off by opening an account with an online broker.

Once you have mastered the basics here, then you can move over to a brick-and-mortar broker for more advanced trading strategies.

Types Of Brokerage Account

You can choose between a discount brokerage account and a full-service brokerage account.

Discount brokers offer low commission rates and limited features, while full-service brokers provide more features and higher commission rates.

Discount Brokerage Account

A discount brokerage account may not be suitable for everyone – especially if you are already skilled and experienced in the investment world.

If you are just starting out investing, however, then a discount brokerage account might be the right option for you.

One advantage of using a discount brokerage account is that you can often get free stock trades, though it is important to note that there is no guarantee that you’ll receive any free trades, so you should always read the fine print before signing up for one.

With a discount brokerage account, you can trade stocks and bonds without paying any commissions.

This means that you pay only the bid/ask spread (the difference between the price at which someone is willing to sell a stock or bond (see also ‘Do Bonds Go Up When Stocks Go Down?‘) and the price at which someone else is willing to buy).

However, you’ll still need to pay taxes on dividends and capital gains.

Full-Service Brokerage Account

With a full-service brokerage account, you’ll pay a fee every time you place a trade.

But you’ll also have access to all the same features as a discount brokerage account.

The main benefit of using a full-service brokerage account is that you’ll have access to professional advice.

Many people use their broker to help them pick stocks and bonds, and you can also ask questions about how to manage your finances.

When choosing a full-service brokerage account make sure that you’re comfortable working with a broker who has experience and expertise in the field.

Stock Trading For Beginners

Individual Stocks

When you purchase individual stocks, you have complete control over your investments.

As such, you can pick and choose which companies you would like to invest in.

This means that you can take full advantage of the market’s fluctuations. It also allows you to monitor the performance of specific companies.

However, purchasing individual stocks comes at a cost. You will need to research each company thoroughly before making a decision about whether or not to invest.

Furthermore, you will need to manage your portfolio yourself.

This includes monitoring the price of your shares and rebalancing your portfolio whenever necessary.

Through Mutual Funds

Another popular option for investors is to invest through mutual funds, and these are very popular options.

Mutual funds are pooled investments that are managed professionally by fund managers, and these managers invest the money into different types of securities such as stocks.

Mutual funds are designed to provide diversified exposure to various asset classes.

They are available directly from brokerages, and they charge fees.

Mutual funds are usually divided into two categories: equity and fixed income.

Equity funds focus on equities, which include shares in companies, while fixed income funds focus on bonds.

Equity Funds

An equity fund invests in stocks. The manager buys stocks when they are cheap and sells them when they become expensive.

As long as the market stays strong, this strategy makes sense because the fund’s performance will increase over time.

Fixed Income Funds

A fixed-income fund focuses on bonds. These are loans issued by governments and other institutions.

When interest rates rise, bond prices fall, and vice versa. So, a fixed income fund will tend to perform well during periods of low-interest rates.

Index Funds

An index fund is similar to a mutual fund, except that instead of investing in individual stocks, it invests in an index like the S&P 500 or Dow Jones Industrial Average (see also ‘How To Invest In Dow Jones‘).

Index funds are great if you want to invest in a broad range of assets, but don’t know much about what type of investment would be best for you.

In addition to buying individual stocks and bonds, you can also invest in exchange-traded funds (ETFs) and real estate investment trusts (REITs).

Exchange Traded Funds

An ETF, or Exchange Traded Fund, is a security that trades on the stock market just like a regular company does.

An ETF is often used to track an index, so it mimics the performance of the index; as an example, an ETF called SPY tracks the Standard & Poor’s 500-stock index.

It’s one of the most widely followed indexes, and it’s considered a benchmark against which other indices are measured.

ETFs are easy to buy and sell, and they offer diversification benefits. But they do not give you direct ownership of the underlying assets.

Instead, they trade like any other stock, and they pay dividends based on the performance of the underlying index.

Real Estate Investment Trusts

A REIT is a publicly traded corporation that owns real estate.

REITs are structured differently than traditional corporations, and they pay out more of their earnings as dividends rather than as profits.

This means that REITs have higher yields than regular stocks.

REITs are attractive because they’re tax-free, and they’re generally less volatile than other investments.

However, there are risks associated with owning REITS, including liquidity risk, credit risk, and management risk.

Direct Investment Accounts

A direct investment account is a special kind of brokerage account that lets you buy individual securities directly from companies.

This type of account has high minimum requirements, and it comes with its own set of fees.

Despite these considerations, direct investment accounts can be useful if you already have money invested elsewhere and need to make additional purchases.

If you decide to open a direct investment account, make sure you understand all the costs involved before you start making purchases.

Which Is The Best Type Of Stock Trading For Me?

The right choice depends on your goals, time horizon, and tolerance for risk, and there are a number of ways to determine the best method of trading and investment option for your portfolio. Some of the main considerations include:

Your Investment Goals

Perhaps the most important factor in your decision will be your individual investment goals and aspirations.

Do you plan to retire early, or do you hope to build wealth over several decades? Are you looking for income now, or do you prefer growth potential?

It is a good idea to consider what your long-term goals are, and your motivations for investing – a financial adviser or planner can be very helpful here.

This allows you to determine how much risk you are willing to take and whether you want to focus on short-term gains or long-term returns.

Time Horizon

Another consideration is how long you intend to hold onto your investments. Will you be holding them for years, or months?

A longer time frame may require greater discipline and patience, but it could also lead to bigger rewards.

Different types of investments work well for different time horizons. for example, bonds tend to perform better when held for a shorter period of time.

On the other hand, stocks tend to provide higher returns over a longer period of time.

By understanding how long you are planning to hold onto your investments for, you will have a better understanding of the best type of trading for your portfolio.

Risk Tolerance

Finally, you should consider your personal tolerance for risk.

You might be comfortable taking a small amount of risk, while others would find even a slight raise in the stakes too risky.

In this case, you’ll probably want to avoid options such as day trading and swing trading, which involve large amounts of risk and stick to options that tend to be safer, such as index funds.

As we have mentioned, an index fund is an investment vehicle that seeks to track the performance of a particular market sector or group of assets.

Index funds are often used by investors who don’t know exactly what their investment goals are, or who are just starting out.

They are also popular among those who are seeking steady returns without having to worry about the ups and downs of the stock market, and so tend to be a popular option for those looking to minimize their risk levels.

Remember the number one rule of investments: never invest more than you can afford to lose.

If you are not familiar with the various types of stock trading, you should first learn about the basics.

Once you’ve mastered those fundamentals, you can begin to explore the many different methods available to you.

Stock Trading For Beginners

What Are The Advantages Of Stock Trading?

Now that we have taken a look at the basics of stock trading, it is time to consider some of the advantages, and ways in which this can benefit investors. Some of the main advantages of stock trading include:

Flexibility

One of the biggest benefits of investing in stocks is that you can choose exactly what types of assets you would like to purchase.

For example, you could decide to invest in real estate or precious metals.

But you could also choose to invest in technology stocks, consumer products, or financial instruments.

This means that you can tailor your portfolio to fit your needs, and can ensure greater diversity in your portfolio.

Diversification

Another advantage of investing in stocks is the fact that you can diversify your portfolio across multiple industries.

By doing this, you reduce the risk of losing all of your capital in one industry. Instead, you spread out your risk among different sectors.

In addition, you can also diversify your portfolio within each sector. For example, if you want to invest in tech stocks, you can diversify your holdings into different types of tech stocks.

Tax Benefits

Investing in stocks offers tax benefits. When you make regular purchases of stocks, you can claim them on your taxes as long as you meet certain criteria.

These criteria include ensuring that the amount of money you spend on stocks must be more than $3,000 per year, and your total income must exceed $200,000 per year.

If you do not meet either of these conditions, then you cannot claim the tax benefits of buying stocks.

However, there are other kinds of tax breaks that apply when you invest in stocks, and these include Capital Gains Tax.

when you sell shares of stock, you may receive a capital gains tax refund. However, this only applies if you hold the shares for over 12 months.

In addition, if you own shares of stock, you can usually expect to receive dividends every quarter.

These dividends are paid to shareholders based on how much profit the company made during the previous period.

Lower Fees

Another benefit of investing in stocks is lower fees. Because stocks trade on exchanges, they tend to offer better prices than private investments.

In addition, because they are publicly traded, you will pay less in transaction costs.

You should note that the fees associated with stocks vary depending on the type of account you use.

Some brokers charge monthly maintenance fees, while others charge annual fees.

You should always check the terms of any contract before signing up for an investment plan.

The Ability To Earn Interest

If you invest in stocks, you can earn interest on your cash. This is known as a dividend yield.

The higher the dividend yield, the more likely it is that you will get a return on your investment.

It is important to remember that dividends are taxable.

Therefore, you need to ensure that you keep enough money aside to cover the taxes you owe.

What Are The Disadvantages Of Stock Trading?

As with any form of investment, there are some potential disadvantages to be aware of, These are important to consider before you part with your hard-earned cash, and some of the most significant things to be aware of include:

They Can Be High Risk

One disadvantage of trading stocks is that they carry high risks.

You could lose all or part of your investment if the market goes down, and this means that you have to be prepared to lose all of your money if the market drops.

It is therefore essential that you understand what happens when the market falls.

There Is No Guarantee That You Will Make A Profit

As with other forms of investment, one key disadvantage of trading stocks is the fact that there is no guarantee that you’ll make a profit.

Although there are many ways to increase your chances of making a profit, none of them guarantees success.

You May Not Receive Dividends

Another major drawback of trading stocks is that you won’t necessarily, automatically receive dividends.

Depending on the nature of your stocks and investments, you may instead receive profits from the companies that you buy into.

This means that you will only receive a portion of the returns generated by your investment.

Trading Stocks Requires Skill And Knowledge

One final downside of trading stocks is that it requires skill and knowledge If you don’t know what you are doing, then you might end up losing money rather than gaining it.

However, if you do want to learn about stocks and share prices, there are plenty of resources available online.

There are also numerous books and courses which teach people everything they need to know about trading stocks.

Stock Trading For Beginners

How Do I Start Investing In Stocks?

Now that we have taken a broader look at the stock market, it is time for your step-by-step guide to trading stocks, read on to learn how to put the information above into practice, and the key things that you need to remember.

Step 1: Choose Your Investment Strategy

Your first step to starting investing in the stock market is deciding between being an Index Investor or an Active Trader.

An index investor buys shares based on the overall performance of the market, whereas active traders try to predict future trends and take advantage of short-term price movements.

If you decide to become an index investor, you should choose an index fund such as the S&P 500 ETF (SPY).

These funds track the performance of the S&P 500, so you can expect to see similar returns to those of the S&P itself.

Alternatively, if you prefer to trade actively, you should choose a strategy that suits your personality and financial situation.

Some strategies involve buying and selling individual stocks, while others focus on predicting the direction of the market over longer periods of time.

Step 2: Determine How Much To Invest

The next thing you need to think about is how much you want to invest.

This depends on several factors including your age, income level, risk tolerance, and current savings rate.

For example, if you are young and earning little money, you probably shouldn’t invest more than 10% of your total monthly income.

On the other hand, if you are older and retired, you can afford to invest more.

In addition, you should consider your risk tolerance. If you are willing to take bigger risks, you can invest more than 10%.

However, if you are worried about losing your entire investment, you should stick with less risky options.

Step 3: Decide Where To Buy Shares

Once you have decided how much you want to spend, you need to decide where to buy your shares.

The most popular option is through a broker, but this isn’t always necessary.

You could also purchase shares directly from the company themselves, or even use peer-to-peer platforms like Robinhood.

You may be able to find cheaper rates by using discount brokers such as ShareBuilder or E*Trade.

However, these services usually charge higher fees than traditional brokers.

Step 4: Research Companies Before Buying Them

Before you start investing in any particular company, you should research them thoroughly. This will help you avoid making costly mistakes.

When researching companies, you should check their financial statements, annual reports, and press releases.

You should also pay attention to whether the company has been involved in legal disputes or bankruptcies, as this could be a warning sign to steer clear.

It is also important to understand what makes the company tick. What motivates its employees? Why does it exist? Is it profitable?

Step 5: Set Up A Plan For Managing Your Investments

After you have researched all the relevant aspects of a company, you need to set up a plan for managing your investments.

This means creating a budget and sticking to it. It also involves setting goals and keeping track of your progress.

Finally, you should make sure you don’t lose sight of why you started investing in the first place – this will help to remove or reduce the temptations to sell stock or withdraw from investments early, and ensure that you have the motivation to remain committed to investments.

Top Tips To Succeed In Stock Trading

So, now that we have covered some of the basics, let’s get into some tips that will help you succeed in stock trading.

Start Small

If you are new to stock trading, it might seem overwhelming at first. Don’t worry though, because starting small is actually one of the best ways to learn.

By choosing a few stocks, to begin with, you will gain experience without having to commit too much capital.

Once you feel comfortable with the process, then you can move on to larger amounts.

Learn About Different Types Of Stocks

There are many different types of stocks available, so it is important to know which ones suit you best.

As we have seen, there are growth stocks, value stocks, and dividend stocks.

Each type of stock has its own benefits, so it is worth learning about each before deciding which one suits you best – do plenty of research before you start investing.

Earn Passive Income

Dividend-paying stocks are great for those who prefer passive income (see also ‘How Much Can You Make From Stocks In A Month?‘) over active management.

These stocks offer regular dividends that investors receive every month.

These dividends are paid out automatically, meaning that you do not have to do anything to receive them.

They are also tax-free, so they are ideal if you want to save money on taxes.

However, dividend-paying stocks are more volatile than other types of stocks, so you should only invest in them when you have enough time to recover from losses.

Final Thoughts

Investing in stocks is an exciting way to grow your wealth.

However, it is important to remember that it is not easy to become successful overnight.

You must put in the hard work and dedication to achieve success.

If you follow the steps discussed and take the time to learn all you need to know to trade, then you will be well on your way to becoming a successful investor in no time.

Luke Baldwin
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