Stock trading is one of the best investment options where returns can be monumental. However, this investment option can be intimidating due to the unpredictability of stock performance. There’s also a lot of baffling jargon to wrap your head around.
If you’re considering investing in the stock market, there are several things you should know to improve your chances of success. This article aims to make investing in the stock market less overwhelming by helping you understand the stock market, how it works, how to read stock charts, and when to invest. You will also be able to infer how the market functions, what risks are involved, and what potential benefits come with sound investment strategies.
The stock market is a combination of different markets where investors buy and sell securities. Commonly traded securities include stocks, bonds, treasury securities, mutual funds, and exchange-traded funds (ETF).
The performance of the stock market is represented by a stock index. The stock index does this by calculating the average value of a section of the stock market. It is the tool used by investors to compare returns on selected stock. By proxy, indices reflect how investors feel about the state of the economy of their nation.
There are thousands of active stocks traded in major stock markets. Since we cannot track every individual stock, the indices are calculated from a group of select stocks whose performance represents the entire market.
Stock market indexes move up or down and give the investor an idea of how the market performs. Movement in stock indexes occurs when stock prices fluctuate due to changes in supply and demand of the underlying security. Investors in the stock market hope to predict the correct index movement.
When you hear of the stock market moving lower or closing down, it means that the stock market indexes have lost value on average. Inversely, stocks within an index are said to have gained value if the stock market closes up.
National indices are frequently quoted by investors and financial managers. They are mostly composed of blue-chip and high-growth stocks listed on the largest stock exchange markets in a given nation. Major national indices include the American Dow Jones, Nasdaq, and S&P 500, the British FTSE 100, the Indian NIFTY 50, and the Japanese Nikkei 225.
Potential stock market investors are being puzzled by jargon-filled rate information making this form of investment challenging to master. Use of intricate financial terms and confusing number crunching can make a new investor feel completely lost. As a new investor, then, it falls to you to get acquainted with frequently used technical terms.
Stock: Capital raised by a company from shares traded.
Share: A single unit of stock representing the fraction of an investor’s ownership of the assets and liabilities of a company. Shares are created when a company divides itself into tradable stock units that are sold to investors to raise capital.
Earnings per share: Total profit divided by the total stock shares outstanding.
Market Cap: Stands for Market Capitalization. It is the total cost of the entire share of stock in a company — number of shares multiplied by the price per share.
IPO: Stands for Initial Public Offering. It is when a company lists its shares of stock on the stock market to be traded to the public for the first time.
Underwriter: The financial institution that processes a company’s IPO paperwork.
Ticker Symbol: A group of letters that are the unique name used to identify a particular stock. Examples include Amazon (AMZN), and eBay (EBAY), Coca-Cola Company (KO), and Microsoft (MSFT), etc. Entering the wrong ticker symbol during a trade gives you the wrong asset. It is a costly mistake common to inexperienced investors.
Buying and Selling: Buying is when an investor places a market order to obtain stocks while Selling occurs when an investor transfers their stocks back to the public in exchange for cash value. Buyers pay an ask price while sellers receive the bid price.
Capital gain and capital loss: Capital gain is the profit an investor makes after closing or selling your stock at a price higher than what you obtained it for. Inversely, investors incur a capital loss if they close or sell your shares at a lower price than what you obtained it for.
Call and Put options: A call option is the right to buy a security at a predetermined strike price while a put option grants the investor the right to sell the underlying security.
Bull and Bear Markets: A bull market is economically sound and is seen in rising stock prices. A bear market is identified by a fall in stock value. Bulls make money when securities go up after buying a call option while Bears make money when securities go down after buying a put option.
Stock markets enable a company to raise capital for growing their businesses. To do this, the company divides itself into smaller units called shares and issues them to the general public when they go public through an IPO (Initial Public Opening).
A company listed on the stock exchange may later create new offers in additional shares, usually by way of rights issues or follow-on offers. These plus other transactions like delisting or buying back of shares by the offering company are facilitated by the stock exchange platform.
Once a company is listed on the stock market exchange, investors in the general public can buy shares; generally through an intermediary such as a stockbroker or investment platform. Investors who buy these shares become part-owners and can be called shareholders. Shareholders can buy and sell (trading stocks) with other investors or among themselves, and the exchange is tracked by the stock market platform.
When investors trade their securities, they are able to turn in a profit by buying when the prices are lower than what they estimate it is worth and selling when the prices are high. Owning shares of a company’s stock may also entitle you to receive some dividend. This is a portion of the profits of the company paid to the shareholders based on their percentage of stock held. Some companies, however, do not issue a dividend to their shareholders. Instead, they choose to reinvest the profits to further expand their business.
The stock market controls trading activities by regulating the transfer of capital and the exchange of securities in a controlled and managed environment. Being a secure platform -also subject to government regulations- the stock market enables individuals to increase their wealth as well as help increase the economic growth of a nation.
Knowing how to read the stocks chart is essential to understanding how the stock market works. The stock table features a string of abbreviations, different number sets, and the stock price chart. The abbreviations are usually the ticker symbols, while the number sets represent the underlying stock values at a particular time.
The stock price chart helps investors easily read the security’s price movement due to its graphical nature otherwise the number-crunching involved would have been overwhelming. Stock performance is plotted on the chart as a sequence of prices over a specified timeframe.
There are three main stock chart constructions; Line graphs, bar charts, and candlestick charts. The line graph and bar chart are standard graphs that show the ups and downs of the underlying stock performance.
The candlestick chart (also, the Japanese candlestick chart) shows greater detail.
Stock charts usually allow for switching between the various chart construction types. You also get the option of overlaying different technical indicators as well as vary the time frame spanned. Daily charts are the most common. However, you may also choose to display intraday, weekly, monthly, year-to-date (YTD) or even the entire historical framework of the underlying stock.
The Candlestick Chart
One candle represents a day in the stock market. The candle/box contains four prices for the underlying stock on the given day – the high and low: the open and close.
Looking at the body of the candlestick, the top and bottom ends of the box indicate where the stock opened and the closing price. This represents how much the stock price moved from where it opened and closed.
Upward movement is denoted by a white box (traditional style) or a green box (modern style) whereas the black or red candles denote a downward movement.
The vertical lines located outside the candle body are the shadows. The upper shadow shows the highest price of the underlying stock on the given day, while the lower shadow shows the lowest price of the underlying stock on the given day – the two make the stock’s trading range of that day.
Since a candlestick is packed with multiple details, investors prefer to use them to analyze shorter spans of trade times.
The candlestick, like the line graph and bar chart shows the pattern of the underlying stock’s movement over a given time frame, but is not able to tell you why the stock moved up or downwards.
Investors earn a profit from trading stock when they make a capital gain (sell a stock at a price higher than they obtained it for) and incur a loss called the capital loss ( Stock price falls lower than they had anticipated).
There are many factors that determine how a stock moves. The most outstanding factor is the change in demand and supply. When there are more investors buying a particular stock, the prices will rise, whereas if more investors are selling, the prices will go down.
Other factors influencing stock price fluctuation include opinions of top investors, media influence, risk factors, political and social unrest, natural disasters, and the absence/ abundance of equivalent alternatives.
Institutions such as mutual funds, endowments, insurance companies, hedge funds, and corporations are the largest players in the stock market. Their opinions influence the rise and decline of the underlying stock value (seen from how they trade, whether they buy or sell a particular stock).
The compilation of the different factors influencing stock price fluctuation is what creates a Bullish sentiment or Bearish sentiment and the corresponding buying or selling. The algorithm plays a considerable role in determining how a trade moves. If there are more buyers than sellers, the stock prices rise, and vice versa.
As an investor, the two most important decisions you will have to make will be when to buy and when to sell. To make a capital gain, you need to make the correct predictions. It requires constant analysis of the stock market and skill in exploiting different trading approaches.
Generally, the best time to buy will be when other investors are pessimistic, and the best time to sell is when other investors are pessimistic. No matter what trade strategy you employ, you need to exercise utmost caution.
Now that you have the basics of the stock market on your fingertips, you might be wondering exactly how do you dive in!
To start trading on the stock market, you need to have a brokerage account and choose a trading platform. Brokers are the intermediaries between you and the stock exchange. You don’t necessarily have to visit the physical marketplace to start trading stocks. The stock market today allows for electronic trading through online stock brokers.
You will have multiple options through which you can fund your stock market investment account. One option is to obtain Individual stocks through your brokerage account. This option is less preferred by most investors and would require a new investor to be familiar with industry trends. They will also be required to stay updated with the latest news on the company whose stock they are trading.
Another option is to invest through tax-advantaged investment accounts like the employer-sponsored 401(K) account and the IRA retirement account. You also have the option of investing through mutual funds, index funds, and Exchange Traded Funds (ETF). These are different types of investment programs that work by pooling funds from various investors to control a common asset.
Like with any investment, the stock market investment is a risky affair. However, any seasoned investor will tell you that stocks carry more potential for gains. Beginners need to ensure that they understand what they are getting into before investing real money.
Stock markets usually have demo accounts that allow the new investor to practice with virtual cash before staking actual money. Once you have everything figured out and are ready to start investing in the stock market, you’ll want to protect your investment against risk by investing in a diversified portfolio.