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Everything you need to know to start making a profit from buying and selling stocks.
For many people, the stock market is a mystical place that they just can't comprehend. It is somewhere created for the rich to make money, that we normal people can't get involved with unless we have a few million dollars to spare.
Many people are scared of it, after watching films like Wolf of Wall Street and Wall Street. We're here to show you that most of these beliefs are wrong.
The stock market is a place where anyone with a good eye for investments (or a good advisor) can make money. And they can do this without having to invest eye watering amounts of money.
Today, we are going to talk you through how you can get started on the stock market, some things you should be prepared for, and we will teach you about the different types of investments you can make.
If you want to learn more, keep on reading...
What is a Stock?
To understand what stock is we should look at how businesses work. Think of a business as an item, once that can be split into smaller parts.
In order to gain more capital, some businesses will sell shares to their investors. These shares mean that the investors will get some of the business's profits.
Shares and Stocks are for all intents and purposes, the same thing. Investors can buy shares/stock to become part of a business. The better the business does, the more the stock is worth, the investors can then sell that stock to others to make a profit.
Every time a business creates new stocks for their company, they dilute the value of the current company stocks. Stocks give investors a chance to support and profit from successful businesses without having to be involved in the everyday running of the business.
This benefits both the business and the investor. Stocks are not physical items and are instead stored electronically in a Demat account. Many larger investors will have a portfolio of stocks - this means that they own stocks from more than one company at a time.
Most people buy stocks for the purpose of selling them once their value rises.
What is the Stock Market?
"The stock market" is a term that has come to encompass many different things that are involved in the trading of stock. It is particularly used interchangeably with "stock exchange".
The stock market generally refers to the overall financial system - like the housing market, for example. It is not a tangible place and is better described as a system to track the strength of the economy.
Individual countries have their own stock markets, but there is also a worldwide stock market. While a stock exchange usually refers to a physical place or website where stocks are exchanged on the stock market.
You can work on the stock market at a stock exchange. For example, Wall Street is the location of some of America's biggest stock exchanges, but the stock market exists across the world.
Stocks are sold and brought on the stock market, at stock exchanges, by both human and machine stock brokers. Stockbrokers will take a fee for every stock that they sell or buy.
Some investors form groups and have once stockbrokers act on their behalf, while others will watch the market and buy themselves.
In America, there have been two major stock market crashes - in 1929 and 2008. Both of these crashes caused serious damage to the World's economy.
Different Ways of Investing in the Stock Market
The reason that many people are put off investing in the stock market is because of how complicated it can be. While the idea of investing in stocks is relatively simple, stocks are not the only form of investment you can make and they don't suit everybody.
In this section, we are going to talk you through the 7 main types of investment that you can make on the stock market. This will help you understand the best type of investment for you.
Stocks are the main type of investment that you can make on the stock market. They are also the most popular. Why?Well, if you had gone onto the S&P 500 and invested $10,000 50 years ago, then today that investment would be worth at least $1.2 billion.
Smart stock buying can result in big returns. How much money it is possible to make on the stock market varies depending on who you ask.
What should you read into this as a potential investor? Well, that most people don't make money on the stock market, but those who do are making a huge amount of money.
Obviously, the data above doesn't tell us how long each person was investing for and what they were investing in. But, you should see these numbers as encouraging.
If you are smart and work hard then there are big profits to be made. Later in this article, we are going to be talking you through the practical ways to get started on the stock market.
Bonds are loans that a business or company takes out. However, they do not take these loans out from a bank (usually because the interest rates are too high), instead, they get the loan from an investor.
These types of loans are called bonds. Investors are often encouraged to offer bonds to make their portfolios less volatile. The stock market is unpredictable but loans are less so.
However, there are still some risks when offering companies bonds and the legal process can be very complex and often expensive.
So, even experienced investors are wary of offering up bonds. When the investor gives the company a bond - they lend them money for a fixed amount of time.
While the company has the bond, they pay the investor regular interest payments. The interest rate of the loan is agreed on before the loan is given.
When the lending period is up the company must pay the investor back in full. The main risk of offering up bonds is that the company you invest in files for bankruptcy before they have a chance to pay you back.
They may also skip interest payments. It is possible to sell a bond or purchase one on the stock market.
Mutual funds are pools of money taken from multiple investors and are used to buy large amounts of stocks, bonds, and securities.
The investors put their money into a pool so that they are able to buy higher value stocks, that are usually more secure but expensive. These stocks usually have a higher likelihood of making the fund a larger profit.
There are few different types (see the section below for more information on Index Funds) of mutual funds, but the most common type is open-ended mutual funds.
These types of funds allow the investors to add and withdraw money when they wish to, compared to closed-ended funds that only allow the investors to withdraw after an agreed upon period of time.
The investors of a mutual fund do not pick the stocks themselves. Instead, they are able to hire portfolio managers to do that for them. The funds are free to hire and fire managers as they choose.
They often spend a good amount of time researching managers before bringing them into the group. One of the major disadvantages of being involved in a mutual fund is that the best fund managers usually have large fees and take big commission cuts from each stock and bond purchased.
These portfolios are designed to accrue lower running costs and portfolio turnover rates than the standard mutual fund. They are also put together to mimic the composition of the financial market index.
They are therefore more diverse than the average portfolio and a more passive form of investment. The general concept behind index funds is that 'over time the market will outperform any single investment'.
What does this mean and how does it work? Well, when the index fund is put together, a market index is chosen and the fund owners set up a series of rules.
These rules instruct the (usually digital) stockbroker to buy stocks and bonds that mirror the state of the index market they have chosen.
With the thought in their head that the market will outperform the average single investment. For example, the fund may choose to replicate the Dow Jones or the S&P 500.
The investor Warren Buffett swears by index funds for making money on the stock market.
An Exchange-Traded Fund (or an ETF) is similar to both mutual funds and index funds. The main difference between the types of investments is that mutual and index funds are bought and sold based on their prices at the end of the day.
Whereas, ETFs are traded based on their fluctuating prices throughout the day. ETFs have a higher risk than mutual and index funds, as their prices can differ greatly throughout the day.
However, with greater risk comes the greater possibility of reward. While prices can drastically drop between the start and end of the day they can also rise unexpectedly.
If the stocks are sold at the right time there is a lot of money to be made. Like Index funds, ETFs are designed to replicate the movements of a single market index - in America the most popular indexes are the S&P 500 and NASDAQ-100 index.
It is not uncommon to see an ETF set up to mimic the price of gold on the Russell 1000 Index. ETFs investors only have to pay tax when they sell their shares in the ETF.
Investors in a mutual fund have to pay capital gains tax every time the fund makes a profit.
Precious metals and commodities
Our final two suggestions for things to invest in are more tangible than stocks, bonds, and funds. Some people like to invest in things that physically exist rather than something more conceptual like shares in a business.
If this sounds like you, then you may be interested in investing in items like gold, oil, or Lithium. If the price of the metal or commodity goes up then you can sell your shares and make a profit.
If the price goes down you can sell at a loss or hold onto your shares until the price goes up again. There have been many times when it has been better to invest in commodities like pigs than stocks or cryptocurrency.
Like all other forms of investment, commodities can be risky and the most valuable commodities are expensive to invest in. However, most commodities exist in a limited amount, which means that they will only grow more valuable over time.
New investors might want to look into investing in commodities linked to sustainability and avoid investing in fossil fuels. This is because we have just seen most of the governments in the world pledge to fight climate change and invest in sustainable technologies.
Some even claim real estate brings bigger returns than stocks. Instead of buying a property, doing it up, then renting it out or selling it - investing on the stock market allows you to enjoy the benefits of real estate without having to go through the hassle.
The downside of investing in real estate on the stock market is that it requires a larger initial investment. With the expectation that the investment would pay off in the long run - barring any local or global crashes in the housing market.
Stocks on the other hand can require much smaller buy-ins but are much more volatile. Stocks in particular are easily affected by other factors and events happening around the world.
Whereas real estate remains fairly unaffected by these things. Real estate should be seen as a more long term investment than stocks as turning over real estate portfolios takes much longer and can be very costly.
However, you will be required to pay less capital gains tax on real estate investments.
Principles of Investing
Before we move on to our practical guide on getting started on the stock market, we wanted to talk about three principles of investing that all good investors should stick to.
The following three principles should be understood before you even start investing. By understanding these principles and how to capitalize on them, you will be able to turn a profit much earlier and you will avoid having to learn these lessons the hard way.
Keep these principles in mind and you will thrive as an investor.
Opportunities and risks
Everyone knows that investing in the stock market comes with some risk. We have all heard the horror stories of people's portfolios losing half of their value overnight and we even mentioned earlier in this article that 90% of people don't make money when investing.
It is important that you fully understand this before you put your hard earned money into the stock market. However, it is equally important that you understand that you cannot make big sums of money without some risk.
The bigger the risk on the stock market the greater the opportunity for reward is. This is why so many people are tempted by the more risky stocks on the market.
If their risk pays off they will be able to make a lot of money. There are ways to invest in the stock market with less risk, but there is no such thing as a risk-free investment.
As we mentioned earlier, there is no way to make money without taking a risk. These less risky investments include buying stock in well established companies, buying bonds, or investing in real estate.
When you invest in less risky forms of stock you are likely to see smaller returns.
Analyzing potential investments
Anyone who wants to be successful in the stock market needs to be good at analyzing investments, the current state of the market, and the possibility of future trends taking off.
There are two types of investment analysis that investors should be aware of - fundamental analysis and technical analysis. Fundamental analysis looks at factors like the GDP, the state of the economy, the rate of job growth, and other financial indicators. It is favored by long term investors.
Technical analysis is used by short term traders to estimate the true value of a stock. It is more insular and looks at the activity going on within the stock market, rather than what is happening outside of it.
Some people make the mistake of thinking that investment is a one-time activity. The best way to maximize your investment potential is to make small but regular investments after your initial spend.
You will also be more likely to make a profit by investing a small amount every month than you would if you made one large investment and then left it alone.
By investing an extra $50-100 a month, you can see huge growth in your portfolio, which is more likely to make you a profit than investing $5000 once every two years.
How to Get Started
Before we leave you, we are going to give you this practical guide to investing in the stock market. So far, we have learned what stocks and the stock market are, about the different ways to invest in the stock market, and the 3 most important principles of investing.
Now, we are going to look at how to get started with investing in the stock market. Like many things in life, the key to successfully investing in the stock market is to plan well.
In this section, we are going to help you put together an investment plan. We will take you through the 7 most important steps in the process.
Open an investment account
The first step to becoming active on the stock market is to set up an investing account. Stocks are traded through a stock exchange, so you need to set up an account with a stock exchange to be able to do this.
The type of account you will need to open is a brokerage account. These are not bank accounts, but more like membership accounts with a stock exchange.
Once you have this account you will be able to trade as you wish. Some accounts only allow you to trade through a web browser, but some come with an app that allows you to trade and check your portfolio on your phone.
Figure out what type of investor you are
The next thing you will need to do is figure out what type of investor you are. There are three main type:
- DIY investor
- Passive investor
- An investor that works with an advisor
As a DIY investor you will be actively picking out stocks that you want to invest in, buying them, and selling them yourself. If you have a good eye for bargains this can be a good way to make money but it is very time consuming.
As a passive investor you will want to be looking for ways to invest that you can set up then stop worrying about. For you, you should look into ETFs, index funds, and mutual funds.
The downside of these low risk investments is that you will have to pay someone else to manage the fund for you and you are likely to see smaller profits.
If you don't want to have to do any of the research yourself, but are interested in having an active portfolio, then you may want to hire an advisor to look after your portfolio.
They will have a greater knowledge of the market compared to you and will be more likely to turn a profit. However, they will take a cut of what you earn and if they are successful in earning you money they will eat into your profit.
All three of these ways of investing are legitimate and legal.
Choose the stocks you want to invest in
Next, you will want to look into the different types of stocks, bonds and funds that you can invest in. We will be brief in this section, as we have covered this information in detail.
Figure out your finances and decide how much money to invest
Our rule of thumb for investing money is that you should never invest money that you cannot afford to lose. It is reckless to invest money that you or your family needs.
You should also never invest money to chase losses or in the hope that you will make enough money to pay off an upcoming bill.
You should make sure that you are not dipping into any emergency funds to invest and that even if you lost everything you will still be able to afford to pay all the bills you need to.
How much money you can afford to invest and what you want to invest will be individual for you. You will want to work out how much you can afford to invest initially, and then work out a small sum of money that you can add to that first investment each month without causing any financial strain.
Remember, investments are not savings accounts, there is no guarantee that you won't lose that money.
Diversify your investments
Ever heard the phrase - don't put all your eggs in one basket? Well, this is particularly true when it comes to investing in the stock market.
If you put all your money into gold and the price of gold starts to tank then you are going to lose all your money. However, if you put some money into gold, some into a body lotion company, and some into automobiles - then even if gold tanks, you will still have your other investments to keep you afloat.
Factors to Consider Before Investing
One of the worst things you can do in the world of investing is to buy high and sell low. So, before you invest in a stock you should do some research into the company.
You should look into:
- The history of their share prices
- How the company is doing
- What their competitor's stock prices are like
- The strength of the industry
- The strength of their company's economy
- How the stock market is doing in general
You should also be aware that factors outside of the stock market can affect the prices of stocks. For example, when the UK voted for Brexit their stock market shrank 10% overnight and continued to drop for weeks afterward.
It still has not fully recovered 3 years later.
Consider Furthering Your Knowledge with Courses
Finally, you can always improve whatever skill you are trying to learn, and trading on the stock market is no exception.
You will find a whole range of courses online that will help you get better at picking out market trends, spotting stocks with huge opportunities, and generally making yourself a better stock trader.
Some of these courses can be expensive, but you should see them as an investment in your ability to invest. If the course is good, the profits you make thanks to the skills it taught you will cover the expense of the course.
Investing in the stock market is not something that should be limited to the rich and the people with economics degrees. It is something that we can all benefit from.
With the help of the guide above you will be able to start trading on the stock market - so, what are you waiting for?
Robinhood is a free-trading app that's ideal for investors who want to trade stocks, options, exchange-traded funds and cryptocurrency without paying commissions or fees.
Below you will find the answer to the questions we get asked most about investing in the stock market.
This will entirely depend on how much you can afford to invest without putting yourself under financial strain.
If you are new to investing and saving then you should consider putting together an emergency fund (enough money to survive on for 3-6 months) before you invest in any stocks.
Investing $1 is better than investing $0.
While it may seem like you are making no progress towards your financial goals, you will find that over time these small investments will add up to something more impressive.
You can then start investing your profits back into the stock market.
In the USA you will be charged capital gains tax on any profit that enters your bank account. This is why many people choose slow turnover portfolios, as they will get taxed less frequently.
If you have an ETF, then you will only be taxed when you withdraw your money from the fund.
Yes, anyone can make money on the stock market if they make smart choices and have a little bit of luck on their side.
If you are looking to make money on the stock market consistently then you should consider low risk investments.