Stock Market Basics Every Beginner Investor Should Know
Many investors aim to put their money into buying stocks, as this option offers the highest potential returns, and performs greatly over the long term as an investment. Stocks refer to a percentage of an equity asset that signifies part ownership in a business corporation and gives you the right to some of that business’s earnings and assets.
Nowadays, ownership of stocks is mostly managed electronically and held by your broker. Nevertheless, the stock market has many complexities and requires some research before you dive into it. From the vast amount of jargon used, to the potential of financial loss for yourself, there are some basics you should learn before investing your money in stocks. In this article, we will discuss stock market basics every beginner investor should know.
Understanding The Stock Market
The first thing you will want to do is understand exactly how the market works. Individuals often speak of the stock market being up or down. They are often talking about major market indexes. A market index monitors how well a set of stocks performs. Which is usually an indication of how the overall market or a specific sector of it, like technology or retail corporations, performs as a whole.
When involved in the stock market, you will commonly hear about S&P 500, the Dow Jones Industrial Average and Nasdaq composite. These are representations for the performance of the market as a whole. Indexes such as these, are used by investors to target the performance of their own stock portfolios. Often they are even used to support decision making when trading stocks.
Stock Trading Information
The majority of investors will smartly build a varied portfolio of stocks or index funds. They stick to this during good and bad times. However, those individuals who enjoy a bit more action, get involved in stock trading. This entails the process of constantly buying and selling stocks in order to time the market. The professionals behind Robinhood app say that the main aim of stock traders is to quickly make profits. This is done by buying stocks when they are at a low and then selling for higher prices. However, as you can imagine this will take up a lot of your time as you will need to constantly monitor the market so that you do not miss an opportunity. The fact that you can access this information on an app on your mobile phone has greatly simplified this approach.
Bull Markets vs. Bear Markets
The terms bull and bear are used to refer to the health of the economy, which has an effect on the stock market. Bull market refers to a rise in the market, as the economy remains stable. On the other hand, a bear market defines a decline in value of stocks when the economy is facing a recession. The state of the economy is crucial and if you decide to invest you must make sure that you understand this well. When the economy is doing well, investors are more confident and more likely to buy stocks and invest. Whereas during bear markets, individuals are more careful as the chances of losing money increases.
Stock Market Crash vs. Correction
A correction of the stock market occurs when the market drops by at least 10%. This is different to a crash, where the drop is sharp and sudden. In a crash, stock prices reduce significantly, representing the bear market we discussed before. Although, fortunately, these do not tend to last as long as bull markets, meaning that stock markets have a propensity to increase in value over time.
When you are learning the stock market basics at the beginning of your investment journey, it is natural to be concerned about a potential crash. However the best thing to do is to focus on long term investment. When your portfolio’s value lower quickly, there is not much you can do. Unless you want to sell for less than your stock’s worth when the economy is stable.
The Importance of Diversification
As an investor, it is impossible to avoid bear markets and crashes in the economy. Although, you can prevent major losses by having a diversified portfolio, as this will protect you from market obstacles that are inevitable. This means that you should not put all of your money into one corporation, but rather invest in multiple types of stocks.
One area of business may be more affected than others at certain times, for different reasons. Therefore, if you invest in multiple stocks, you can be sure some of your stocks will be doing well whilst others drop significantly. Although this takes time, energy and effort, it will give you a balance and reduce the potential risk of loss.
Investing in the stock market as a beginner can be overwhelming. Hopefully the stock market basics above provide you with the foundation to get started on this journey.