Many investors aim to put their money into buying stocks, as this option offers the highest potential returns, and it performs significantly 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 a few stock market basics every beginner investor should know.
The first thing you will want to do is understand exactly how the market works. People often speak of the stock market is up or down – they are often talking about significant 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 the Nasdaq composite. These indicators are representative of the performance of the market as a whole. As used by investors, indexes such as these target the performance of their stock portfolios and even support their decision-making when trading stocks.
Trading within the stock market is no longer done on a trading floor involving a crowd, hand gestures, and a lot of shouting to sell and buy stocks, as you may see in the movies. In the current times, thanks to the tremendous expansion in technology, there are applications available that you can use to be involved in the stock market without even leaving your home. The pros behind the Robinhood app suggest that using a trading app is a smart move for beginners as most of these applications are simple to use and free of charge. Doing this is an easy way to invest the extra money you may have, although it is essential to note that you will still require the right strategy and some basic knowledge to make a profit.
The terms bull and bear are used to refer to the economy’s health, which affects 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 stocks’ value 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.
A correction of the stock market occurs when the market drops by at least 10%. This is different from a crash, where the drop is sharp and sudden. In a crash, stock prices reduce significantly, representing the bear market we discussed before. 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 beginning your investment journey, it is natural to be concerned about a potential crash. However, the best thing to do is to focus on the long-term investment. When you notice your portfolio’s value lower quickly, you cannot do much unless you want to sell for less than your stock's worth when the economy is stable.
As an investor, it is impossible to avoid bear markets and crashes in the economy. You can prevent significant 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 stock types.
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 while 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 will provide you with the foundation you need to get started on this journey.