Basic Understanding of the Stock Market is essential for anyone new to investing in the stock market who is looking for a simplified scaled down reference point to make sure you understand your investments and strategies. We’ll help you with the information you need to protect and grow your stock investments in today’s changing market. Whether you are a completely new investor or simply confused about all the contradictory advice out there, this information will help you while laying down the keystone for your investment journey.
What is a stock?
The term ‘stock’ is commonly used in investment spheres but not many people may be able to define what it is. A stock represents a share of ownership in a listed company. A stock is a claim on a firm’s earnings and assets. When you purchase more stocks, your ownership stake in the company becomes higher. When you buy a company’s stock, it implies you are recognized as one of the company owners and because of this, you have a small portion of claim to every asset an establishment owns. When you purchase a stock, you own every piece of trademark, furniture and contract of an organization. Since you are an owner, you have the freedom to share a firm’s earnings as well as participate in voting exercises that are directly related to the stock.
Introduction to Stock Markets:
The stock market provides a place where auctions are conducted concerning the sales and purchases of stocks. During the hours that the stock market is open, the prices of stocks change moment by moment. When someone offers shares for sale, individuals and organizations bid for them. When the prices at which owners are willing to sell match the prices at which others are willing to buy, the owner- ships of stocks change hands; that is, stock trades take place. At one time, stock trading was done manually. Today, virtually all stock trading is done by computers. You can easily buy and sell stocks using your home computer!
Why Invest in The Stock Market?
With the current economic state and the high costs of living, a lot of people prefer to safeguard their future by finding a way to save and improve their financial status. In the recent times, the stock market has become a popular investment choice for many individuals. First and foremost, the stock market is versatile and offers you plenty of choices to choose from. Shares, debentures, bonds and securities are some of the common stock market options available. This is an advantage because it means you have plenty of investment opportunities for your money. The stock market is a place where you can grow your investment over time and reap handsome benefits in the coming days.
What are the Instruments Traded in the Stock Market?
With the high number of people looking for affordable and safe investment options, the stock market has provided a safe haven for people looking to save and better their financial future. Before investing in the stock market, it is good to understand what you are getting into in order to make the right decisions that will safeguard your investment. Before investing in the stock market, it is wise to ensure that you get adequate professional advice in order to determine the right investment for you. The stock market is a vast industry with many types of investment and understanding each investment and evaluating its suitability for meeting your investment objectives is critical.
In case you want to be part of the stock market, they are different types of instruments that you can use to attain your financial objectives. Some of the common investment types are stocks, mutual funds, IPO’s, Futures and Options. The first step of becoming a successful investor is to understand the definition of each investment instrument, its characteristics and how it can be beneficial to you. Below are definitions of common investment instruments used in the stock market.
Shares: A share is a stock that is sold to investors by a company and represents a unit of ownership. When an investor buys shares in a company, they buy a piece of the company. It is however important to understand that shares are distributed amongst many investors and therefore, ownership is represented in terms of a very small percentage. When you are a shareholder in a company, you have voting rights but lack the power to make key decisions affecting a company.
Mutual Funds: Unlike shares which are owned by individuals, mutual funds bring together a group of investors. Here, a portfolio manager is appointed and tasked with the responsibility that money collected from investors is invested in a suitable investment opportunity that will guarantee good returns.
IPO: IPO is an abbreviation of Initial Public Offer and refers to a scenario where a company advertises its stocks for the first time to the general public. Companies use IPOs to raise money for funding various corporate development projects. An IPO presents a good opportunity for an investor to enter the stock market with the hopes of making good returns.
Futures: This is a financial contract that obligates either a buyer to acquire an asset or a seller to dispose an asset which includes a stock at a date and price which are already predetermined.
Futures contracts include the both the quality and quantity of the asset in question and they are standardized to enable trading on a futures exchange. The futures market is characterized by its capability to make use of a high leverage relative to the stock market.
Options: This is a contract that allows a buyer the freedom to buy or sell an asset for an agreed price on or before the specified date. An option works the same way as a bond or stock because it also acts as a security. It’s worth mentioning that this contract is binding and comes with a set of defined terms.
Types of Stocks:
Common stock is a term that is often used in the stock market. A common stock is simply defined as a share that represents ownership in an organization. Investors who purchase common stocks are allowed to participate in elections by voting and selecting a board of directors in accordance to company policies. When you purchase common stocks, you become part of the ownership structure. In case of liquidation, common stocks owners have to wait until preferred shareholders, bondholders and other debt holders have received their full payment. Common stocks have different names, for instance, they are referred to as ordinary shares.
Unlike common stocks, preferred stocks don’t give shareholders a right to vote. Preferred stocks are also known as preference shares. For preferred stocks, the investor and company offering the stocks have to negotiate the terms. It’s good to mention that preferred stocks can be converted into common stocks. In the case of bankruptcy, owners of preferred stocks are always given priority with payments before other common shareholders.
Many stocks sold in the stock market are Blue-Chip stocks. Blue-Chip stocks are the ones that most people feel are the safest stocks in which to invest. They are the stocks of highly successful companies. These companies have been successful for a long time. They pay satisfactory dividends and have shown impressive growth over the years. Their stock prices go up year after year and the dividends they pay are increased frequently. Blue-Chip stocks don’t come with labels identifying them as such. If they did, they would not be difficult to identify. It’s also a fact that many stocks which, at first, seem to be blue-chips turn out not to be. Some stocks may be blue-chips at some points in their history but lose this status later on. Identifying these excellent stocks is not easy. Your biggest problem in investing for retirement will be in identifying them. In subsequent books in this series, I give you guidelines that will help you find the stocks in which to invest. I also give you guidelines that will help you determine when you should make changes.
Why people buy certain stocks?
When a company first issued stock, many people purchased the stock that was offered. Here are some of the reasons that various persons might have purchased the stock.
Bulls and Bears:
You may have heard about the bulls and the bears. Bulls are people who hope prices in the stock market will rise. Bears hope they will fall. When prices in the stock mar- ket have been rising for a long time, the market is referred to as a Bull Market; when prices have been falling, it is referred to as a Bear Market.
Types of Orders:
As an investor in stock trading, you are required to execute a position regardless of whether you are trading online or you are using a broker. This is referred to as Execution of an order. Before getting to know about the different types of orders, it is important to understand what an order is. There are various types of orders and selecting them depends on the nature of trade or transaction you wish to carry out.
Furthermore, you must put into consideration an analysis of the predictions of how a stock will behave. There are different types of orders but the four most common you are likely to come across are; Market Orders, Limit Orders and Stop Loss Order. However, there are also several other types of orders used in stock markets.
In this case, when you decide to trade a position, you need to get in touch with your broker or use your online trading platform. Once this is done, you can then go ahead and place an order for whatever stock you intend to trade. Here, you have the freedom to choose the stocks you want to trade, their volume as well as price. For online traders, this procedure can be simply completed only with a few clicks.
The four main types of market orders are; Buy Stop, Sell Stop, Sell Limit and Buy Limit.
Buy Stop: This is a pending order that a trader uses when they expect stock prices to go up. By doing this, investors have an opportunity to decide an entry price they feel will be safe for them. A buy stop entry is set and once stock prices reach this level, the long entry is triggered.
Sell Stop: The sell stop order operates similarly to a buy order only that in this pending order, a trader expects the price to go down and enter a position at a price he or she is comfortable with. For instance, when trading a USD/JPY pair currently at 100.20, a trader could play safe and instead short the pair to less than 100.20 by setting a sell stop at 99.92. In the event that the price falls below 99.92, the sell entry is automatically triggered.
Sell Limit: Just like stop orders, limit orders are used to enter the market when stock prices are at a certain level. However, for limit orders, they are commonly used as a profit maximizing strategy. This market order is used by a trader when he wants to join the market once the price has enough support and is able to quickly bounce back and continue on an upward trend.
Buy Limit: Buy limit shares a similar concept to Sell limit. In this case, a trader is responsible for setting the price level at which he wants to enter on a given pair.For instance for a buy limit order of 1.2820, a trader could enter and hope for theprice to rise to let’s say 1.2860 which will represent a 40 points profit.
In summary, stop and limit orders are both used to enter the market when prices are at certain levels and can appear after a period of time when a trader is not physically present and using their computer. Knowing how to best use these market orders is the best way to ensure that you use smart trading tactics that will enable you to make good profits from stock trading.
With this type of order, you can decide to place a buy or sell order in future after a stock attains a particular price you are comfortable with. This is done after you have carried out a thorough analysis of the stock and have decided the price extent you think it will reach. Immediately the stock attains the expected price, the limit order you put forward activates your account and opens the position for trading. The advantage of a limit order is that if the stock fails to reach your specified price, your order is automatically cancelled. This is convenient because you don’t have to spend all your day analyzing trade figures of your stocks.
This is an option that allows you to place orders beyond the normal working hours for stock markets. It’s worth mentioning that all traders who use an online trading account have this feature since online trading transactions can be initiated at any time.
A bid is the current highest price at which you could sell. In simpler terms, if you want to sell you gold, in generally, you can sell to the nearest to the bid price but not the bid price.
Ask is the opposite of bid. Ask is the current lowest price at which one can purchase. As a main rule, one can but it often higher than the ask price.
Is the Stock Market Good for Retirement Investing?
Nowadays, a lot of people are looking for ways to save for retirement. Considering the current high cost of living and rapidly changing economic times, it is important for investors to begin looking at ways of securing their finances at old age. Nowadays, there are several ways to save for the future. However, investing in stocks is one of the most common options that several people opt for. Thanks to stock investments, a lot of individuals have been able to expand their financial investment portfolios and in turn, lived a financially independent life.
People invest in stocks for different reasons. If you decide to purchase stocks for retirement purposes, it is always better to do it when you’re still young. The stock market is highly volatile and early investment gives you plenty of time to expand your investment portfolio. When choosing stocks for retirement purposes, it is essential to carefully research and get all your facts before making any decisions.
Investing in stocks for retirement means it’s a long term investment and therefore, you must choose to invest in firms which are stable in terms of financial performance.
Retirement investing is a wise thing to do especially if you want to live a fruitful life of financial abundance. However, before putting your money into stock, have your goals clearly defined and speak to an expert.