As investing becomes more accessible to all, it often leaves beginner investors feeling overwhelmed and unsure where to begin, especially with the influx of investing opportunities, specifically the stock market. Learning how to trade stocks can feel as impossible as fitting into some low-rise jeans after Thanksgiving dinner, but it doesn’t have to be. Here are some basic to-knows to help you start the journey of long-term investing:
What is the Stock Market, and
How Do We Make Sense Of It?
Before we talk about how to trade stocks, it’s important to know the stock market. Stocks are shares of a company representing ownership worth or equity, which entitles the stock owner, or shareholder, to voting rights and so much more.
The stock market, however, is exactly how it sounds. It is a place where individual and corporate investors come together to buy/sell shares in a public or electronic marketplace. Investors keep track of their stocks using a market index that tracks the supply/demand and the price influx of each share.
However, the stock market isn’t like Etsy where you make the purchases/sales of stocks on your own. You will need a broker, whether that be online or in person. A broker is a person you use to buy shares of stocks. Think of a broker like a cashier; you can use the cashier or check out yourself. Either way, you need the cashier (the electronic one or the person as the cashier) to certify your transaction. A broker is like that you can deal with a person or purchase your stocks electronically.
Investors can then build a well-rounded portfolio of stocks and use the market index that we talked about to track the performance of their stocks and whether they should trade them or not. This is what we call the “long game” for investors.
But not all investors are looking for the commitment it takes to be in the long game. Unlike other investors who build well-rounded portfolios of stocks and stick with their shares during the good, bad, and ugly, stock traders are in it for a good time, not a long one. Stock traders tend to do extensive research on their own, often spending large chunks of their time studying the ever-so fluctuating market.
The purpose of stock trading is to buy stocks when they are on the decline and sell stocks when they turn a profit by capitalizing on “short-term market events.” They rely on various strategies to predict the stock’s trends and future to determine whether it is a viable option to (or continue to) invest in.
How to Deal with a Crash and
Why Diversification is Important
Making the step to invest can be emotionally challenging for some as there are instances when there is a financial decline in the stock market. My family only recently started investing due to the fear of losing money investing in an unpromising stock.
This is widespread fear among Americans. Many people would rather avoid investing at all because of their fear of a market crash. However, it’s essential to understand that a possible decline is par for the course. Sometimes a slight decrease in the market doesn’t always mean it’s going to crash; it could just be a stock market correction, even if it’s a 10% decline.
While it can be challenging to watch your portfolio’s value shrink in real-time and do nothing about it, pulling all your money out during a decline is the only way to guarantee a financial loss. Even if you were to try to buy back into the market when it’s back on the incline, you would certainly have to pay more.
A portfolio’s bounce-back game is mighty hefty, and if you’re investing for the long term, doing nothing is your best course of action.
Another form of protection against unavoidable market fluctuations is what we call “diversification”. There are a lot of risks that come with having a(n) uniform portfolio.
What I mean by this is that if you have all of your shares in one organization, you are putting yourself at risk of losing all your money to human error or extenuating circumstances like the COVID-19 that took many lives and businesses down with it.
To help avoid this, it’s important to apply a life tool that my great grandmother would always say: “spread your coins out. Put some in your front pocket and some in your purse so if something happens, you’ll still have some money on you”.
Applying this to investing, diversify by different grouping types of stocks together. That way, if an error does occur, you would only take a slight hit instead of a blow to your head. The only con with this method is that building this type of melting pot of a portfolio takes extensive research, Redbull, patience, and time.
If you are like me and do not have 2 out of four things, it might be better to look into a mutual fund. A mutual fund is an investment program that is professionally managed that trades diversified holdings. This way you wouldn’t have to worry about diversifying your portfolio yourself.