Investing is a method to plan for and influence your future; stocks are a tool that everyone may use to build wealth. Learning the basics of the stock market and how you might invest in stocks is an important first step if you’re thinking about putting money aside for the future.
This article will help you get your feet wet in the stock market and learn how to become an investor by explaining the basics, such as the definitions of key terms, the structure of the stock market, and investment guidelines.
How the stock market works
Through the stock market, companies can attract investors (both individual and institutional) and use the proceeds to expand their operations. Stocks, or shares of ownership, can be issued by a firm to the public as a means of capital raising. These shares are traded on public stock markets, including the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASDAQ).
Unlike starting your own business when purchasing stocks, you have been deemed a shareholder and are granted partial ownership of the business. If the company is successful, the value of its shares will rise, and the shareholder will be able to cash in on that growth at a profit. However, if the company underperforms, the stock price may fall, and the investor may incur a loss.
Which factors influence the rise and fall of stock value?
The market forces of supply and demand establish the value of a stock. The price rises when there are more buyers than sellers for a given stock.
When more people are looking to unload shares than buy them, the stock price falls. This is why price fluctuations in the stock market may be so dramatic.
What time does the stock market open?
Trading hours in the stock market vary by exchange, but the New York Stock Exchange (NYSE) is open from 9:30 am to 4:00 pm Eastern Time, Monday through Friday.
| Region | Market Open | Market Close |
|---|---|---|
| Eastern Standard Time (EST) – New York | 9:30 AM | 4:00 PM |
| Central Standard Time (CST) – Chicago | 8:30 AM | 3:00 PM |
| Mountain Standard Time (MST) – Denver | 7:30 AM | 2:00 PM |
| Pacific Standard Time (PST) – Los Angeles | 6:30 AM | 1:00 PM |
| Alaskan Standard Time (AKST) – Alaska | 5:30 AM | 12:00 PM |
| Hawaii-Aleutian Standard Time (HST) – Hawaii | 3:30 AM | 10:00 AM |
What is a stock index?
Stock market indexes, such as the S&P 500 in the United States, monitor the performance of a group of representative stocks and report on the market as a whole. All the stocks in the index contribute to the index’s overall value. A rising index indicates that the stocks it tracks are performing better as a group. Stocks included in the index that see a decline in value reflect that trend.
Stock mutual funds and exchange-traded funds (ETFs) are alternatives to buying individual stocks that allow investors to purchase a diversified portfolio of equities with a single investment. Investing in ETFs you may see fewer extreme swings in price.
If you want to learn how to become an investor, it is crucial to understand the dangers and do your research before participating in the stock market. But overall, it can be a way for firms to generate funds and for individuals and institutions to participate in those companies.
How much money can you make from the stock market?
The amount of money you could make investing in the stock market depends on several variables:
- The stocks you choose
- The period you hold them
- The market’s performance as a whole
Long-term solid returns have been available from the stock market historically.
Popular U.S. stock market index S&P 500, has returned 10% annually on average over the past century.
However, it is important to remember that past results are no guarantee of future success.
Keep in mind that your capital is always at risk in the stock market and that your portfolio’s value can fall as a whole or in the case of individual holdings. When investing in the stock market, try to keep a long-term view because the value of individual stocks can change a lot in a short amount of time.
Remember that investing in the stock market should be done as part of a diversified portfolio, not as a short-term speculative play. So, try to focus on the following:
- Have a plan and stick to it
- Don’t invest more than you can afford to lose.
The appropriate investment strategy for you will depend on your unique situation, financial goals, and level of risk tolerance, all of which should be discussed in detail with a financial advisor or specialist.
What are the four rules of investing?
There are many different rules and principles of investing, but here are four common ones:
Diversify your portfolio
Diversification is the practice of spreading your investment across different assets, such as stocks, bonds, real estate, and cash. By diversifying your portfolio, you can reduce risk and increase your chances of earning a positive return.
Have a long-term perspective
The stock market can be volatile in the short term, but it has historically provided strong returns over the long term. Therefore, it’s important to have a long-term perspective when investing in stocks.
Keep your costs low
The costs of investing, such as trading fees and management fees, can add up over time and eat into your returns. Low costs are critical, so choose low-cost investment options and limit your trading activity.
Stick to your plan
Having a clear investment plan and sticking to it can help you stay focused and avoid impulsive decisions. Make sure your plan aligns with your investment goals and risk tolerance. It’s also important to regularly review your plan and adjust it as needed.
It’s worth noting that these are not the only rules of investing, and it’s essential to do your research and consult with a financial advisor if you have any questions. Investing in the stock market carries risk, and you should only invest money you can afford to lose.
A step-by-step guide to investing in stocks
Here is a step-by-step guide to investing in stocks:
1. Choosing a trading platform
A good place to start investing is by selecting a reliable trading platform that can accommodate your specific trading requirements. You can choose either a traditional broker or a Robo-advisor.
Search for sites that provide a flexible selection of investments, a reasonable cost of participation, and an intuitive interface. Some platforms also offer educational resources and tools to help you make informed investment decisions.
Opening a brokerage account
An online brokerage account is an easiest and most cost-effective way to invest in stocks, mutual funds, and other vehicles. You can open a taxable brokerage account with a broker if you are already saving enough for retirement in a 401(k) or another employer-sponsored plan, or you can open an individual retirement account (IRA).
Opening a Robo-advisor account
Robo-advisors allow people to reap the rewards of stock investing without incurring the time and effort often associated with making such decisions on their own. Complete investment management is available through Robo-advisory services. During the onboarding process, these firms will inquire about your investment objectives and then construct a portfolio accordingly.
Although it may appear pricey initially, the management costs above are typically much lower than those charged by a human investment manager: Robo-advisors typically charge 0.25 percent of your total investment portfolio. And indeed, if you prefer, you may open an IRA with a Robo-advisor.
2. Choosing a trading strategy
Once you have access to a trading platform, you should select a trading strategy consistent with your investment objectives and comfort level. Finding a successful trading strategy requires exploring the many options available. There are two main investing strategies:
- Passive investing
Passive investing, or the “buy and hold” strategy is a do-it-yourself (DIY) method of investing that is highly effective over the long term. That is to say; instead of hiring an expert, you can handle it independently.
A buy-and-hold investment approach recommends purchasing assets and holding on to them for as long as feasible. Focus on “time in the market” rather than trying to “time” the market.
- Active investing
Active investing is a style of investing in which one constantly buys and sells stocks in response to market fluctuations. Either you or a hired professional can manage your investments. Active investing maximizes profits through increased purchase and sell activity at predetermined intervals.
Other investing strategies include:
- Value investing (purchasing stocks of undervalued companies with solid fundamentals)
- Growth investing (buying stocks of companies with strong growth potential)
- Momentum investing (buying stocks that have been performing well recently)
- Swing trading (this strategy involves buying and selling stocks over a short time, usually a few days to a few weeks)
- Day trading (buying and selling stocks within the same trading day, taking advantage of short-term price fluctuations)
- Options trading (it means buying and selling options contracts, which give the holder the right, but not the obligation, to buy or sell a stock at a specific price on or before a specific date)
- Index fund investing (this strategy involves investing in a diversified portfolio of stocks that mirrors the performance of a stock market index such as the S&P 500.
An alternative strategy is to use an automated investment service, or “Robo-advisor,” that makes financial decisions based on predetermined parameters.
3. Consider a long-term game
Investments in the stock market have proven to be a good strategy for building wealth over the long run. The stock market typically yields an average yearly return of around 10% over several decades. Keep in mind that this is only a generalized estimate of the market’s performance, as individual stocks and even specific years might have wildly different results.
Investors searching for the long-term average will find the stock market beneficial regardless of what happens daily or annually.
4. Never stop learning
Investing in stocks is a continuous learning process. Stay informed about market trends, read financial news, and learn about investment strategies and opportunities.
FAQs
What does stock investing mean?
Stock investing refers to the process of buying and holding stocks, or shares of ownership, in a company. When you invest in a stock, you buy a small piece of the company and become a shareholder. The value of your investment will fluctuate based on the performance of the company and the overall stock market.
When a business needs cash, it can do so by issuing shares of stock to the public, which can then be traded on stock markets. Dividends, which are payments made by corporations to their shareholders, and capital appreciation, which is a gain in the value of shares, are two ways in which shareholders might make money.
You should know that investing in stocks is risky and that your money could lose value if the market or the company you invested in does poorly. That’s why it’s crucial to spread your bets over many stocks and sectors, look at the big picture, and study the company thoroughly before putting your money down.
Overall, stock investing is a way for people and organizations to invest in companies and get a return on their investment; however, there are risks involved, and prospective investors should be aware of these risks and conduct their research before making any purchases.
What is a Robo advisor?
A Robo advisor is a type of online investment service that uses algorithms and technology to provide automated, algorithm-driven financial planning services with little to no human intervention. These services include portfolio management, automated investment advice, and other financial planning tools. If you don’t have the time or expertise to manage your portfolios, consider using Robo advisors to make investing more accessible and convenient. They typically have low account minimums and lower fees than traditional financial advisors.
The Bottom Line
If you’re just starting, the stock market can seem like a complicated and intimidating place to invest your money. You must first establish a financial plan and set your objectives. After that, you should research your investment options to pick the most suitable for your needs and level of comfort with risk.
The important thing is to start and keep going. The best action plan is the one you’re most likely to follow through on. Remember that your money is always in danger, and check any costs involved.
Tetiana is a business coach and owner of IStartHub, a business media for ambitious female entrepreneurs and small business owners.