Beginner Investing: Stock Market Investing for Dummies

Posted by Pierre de la Fortune on December 02, 2015 @ 12:01 a.m.

Written by Jayashree Pakhare

One of the smartest ways of making money is through investment in stocks. The stock market is one of the most brilliant financial institutions ever created, which fulfills the need of capital that businesses are looking for, while letting investors profit as shareholders in companies. It is 'win/win' platform for investors and businesses. However, making money on the stock market is no child's play. Trading stocks requires a substantial amount of study and understanding, before you put your hard-earned money on the line and begin making profits. There are no shortcuts to riches and same applies to the stock market. There is no easy money you can make here, but it is the easiest path to lose your money, if you naively invest money like buying a lottery ticket. Understand how to evaluate the worth and potential of a stock, before going ahead. This Buzzle article is a straightforward guide on stock market investing for beginners, which will surely demystify the whole business for you.

What is a Stock or Share?

When you buy a stock, you buy fractional ownership in a company issuing it. A company 'goes public' or becomes a stock listed company, when it sells a part of its equity holding to raise capital, through an IPO (Initial Public Offering). The stocks are sold at a fixed value in this initial sale, after which they can be traded on the secondary market, which is the stock market. Stocks come in two types - common and preferred. Preferred stock owners are provided with extra privileges, which include them being given the first preference when profit dividends are distributed. Common stock owners are given second preference in that regard, though they usually have voting rights (on company's important business decisions), which are generally not offered to preferred stockholders. The stocks you buy on the exchange are mostly common stocks.

The Stock Market

The stock market is an organized system of buying and selling stocks and shares. It's the place where these transactions take place. Every stock market has an 'Index', which is a statistically calculated number, that gives an idea about how listed stocks are performing. Examples are Dow Jones, Nasdaq and S&P 500. Value of these indices is calculated from the performance of a bunch of blue-chip benchmark stocks. Before investing in the stock market, you need to know how it works. Stock exchanges provide a unique opportunity for investors to create wealth through smart choice. Let me provide a brief overview of its working in the following lines.

How Stock Market Works?

Every investor in the stock market is allowed to make transactions with stocks, shares or bonds. You can only invest through a licensed broker, who facilitates the buying and selling of shares. The price of a stock depends on the demand and supply of that particular stock and the performance of the underlying business. The seller and the buyer mutually decide the price of the trade.

There is a trading method known as open outcry. The traders gather and communicate their individual quotes or bids to sell their stock in the stock market. This is called "bidding" where the bidding price changes simultaneously and stops only when a bid is singled out as the highest. Traders aim to 'Buy stock cheap and sell dear', to make profits for their investors and themselves.

Today, there are other virtual trading places like the computer terminal, to carry out stock investing. Here, traders sitting on computer terminals bid through computers within a network. This is the most accepted way of trading nowadays. Stock traders provide investors with online accounts to buy and sell stocks. The Internet has accelerated the pace of stock transactions worldwide, by speeding up the exchange of information and providing access to global investors. A highly recommended guide on stock investing is the book 'Intelligent Investor' by Benjamin Graham, one of the most venerated Wallstreet masters, who's students include the legendary investor Warren Buffett.

Investing For Beginners

It must be kept in mind that beginners will not find it easy to make money at the stock exchange. One needs to master the technical analysis of stocks, to evaluate their inherent value. This involves the study of all stock vital statistics like P/E ratio, dividend yield, trading volume and balance sheets of the company. If it were easy, everybody who's an investor would be a billionaire. The path to investing success takes time, serious study, disciplined efforts and most importantly, independent thinking.

Stock market investing can be confusing, especially for the beginner. Getting some basic tips can help a beginning investor to make informed choices that fit their needs. Each person has a different goal when investing and that plays a big impact on how you invest. Investing is a rather touchy subject for most of the beginners because of the fact that they are intimidated by what they don't know about it. But investing in the stock market is probably not complex, as some financial advisors believe. In fact, it is something that almost anyone and everyone can do. With that intact in mind, following tips can be useful to get started in stock market.

* Understand that there are no set rules for investing. There are no guarantees and no perfect way to invest. * Make informed or knowledgeable choices. Before investing in any way you should completely understand how your investment will work and all the details of the transaction. * Make a simple plan to determine your goals and needs. This will help you to determine what investments to make and how much money to invest. * Look at the value of the stock instead of the price. Low cost stocks may be low for a reason. Look at the whole picture. See why the price is low and if there is a possibility it may rise. * Check the companies return on net worth. This is the profit after taxes divided by the net worth. It is important to see a trend of growing return on net worth. * Spread out your risk. You should not put all your money in high risk stocks. Try some lower risks and some higher risks. This is the best way to protect your money. * Understand the basics of stock prices. Prices move up or down depending on future projections. * Keep on learning and discovering new things and plans about investing. The Knowledge is a key to success.

These short tips can help a beginning investor start investing in the stock market. These tips are just the beginning to understanding investing and how to maximize your return, but you have to keep on learning.

While investing in stocks, it is easy to become distracted and lose focus. Maybe your stock has been going down recently and you are afraid of losing any more money. Maybe you have found another stock you are interested in buying, but you need to sell your other stock first. Maybe you don't like the ups and downs associated with investing in an individual stock. In such a scenario, these simple questions might come handy while investing in the stocks:

* Is the money I invested "extra" money that I can afford to lose or at least hold on to through the rough times? * Do I have additional money to invest if another opportunity arises or am I locked into one stock? * Should I still buy the stock today? * Should I consider investing in something that has less volatile price movements?

These introspective questions are necessary to keep you on the right track and prevent emotions from ruling your decisions. Intelligent investing is about picking solid stocks with earning potential. Let logic and pure technical analysis of a stock guide you. Start trading in low volumes and learn the ropes. Start small and expand your portfolio slowly by smartly choosing promising stocks. Wish you all the very best!

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