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Generations have been raised thinking that the stock trading basics are impossible to understand. We’ve been convinced that we should only save, and leave stock investing to the rich people. But the truth is, the anyone can use the stock market to build wealth.
So allow me to explain to you, one by one, the stock trading basics. I’m going to educate you about everything from stockbrokers, brokerage accounts, to the differences between trading and investing.
Because if you plan on building wealth throughout your lifetime, you’ll need to do more with your money than just stick it in a savings account.
Stock Trading Basics To Know Before Putting Your Money In
The stock market has been around a long time.
The issues is – most of us were never taught the absolute basics when it comes to investing, let alone stock market investing.
Luckily, just knowing the basics of stock market investing can get you started and on the right track to wealth building.
What Are Stocks?
Stocks are shares of a company that you can purchase to become part-owner of the company, allowing you to receive a portion of the profits it earns.
When a business does well, more people buy its stocks, causing the stock prices to increase. Likewise, when a company does poorly, fewer people invest in it and its share prices drop.
What Is The Stock Market?
The stock market is a broad term that refers to the people and businesses that exchange equities (stocks, bonds, etc.), and a stock exchange is a physical location (online or offline) where trading happens.
Most people do their stock trading online, but the stock market does have a handful of physical locations across the globe — the largest is the New York Stock Exchange (NYSE), located on Wall Street in New York.
Stock Investing VS Trading
The first step in understanding the stock trading basics is to learn about the differences between the two most fundamental stock market investing practices: stock investing vs trading.
Passive Stock Investing
Stock investing is generally a more passive activity that takes a long-term approach to build wealth. Passive investors follow strategies that usually involve ignoring short-term losses in exchange for long-term earnings.
For example, is the company likely to sustain itself over several years? Will it become more profitable over a period of years or even decades?
On a basic level, passive investors are betting on a company’s ability to succeed over a long period. So regardless of how the market performs they are likely to hold on to a stock for years.
As a passive investor, it requires persistence and strength of mind to remain committed to your resolve to hold on to a stock, even in the most turbulent times.
Moreover, it’s important to have a carefully designed plan to buy and sell your holdings in order to gain maximum returns from long-term stock market investments.
A commission-free M1 Finance account is the perfect introduction to passive stock investing. It’s a customizable, pie-based software that takes away the complexities of stock investing – all from your cell phone or computer.
Active Stock Investing
Active stock investing is practically stock trading.
Stock trading means investors use short-term strategies (daily, monthly, or annual) to maximize their returns.
In other words, traders look for stocks they can purchase at low prices so they can turn around and sell them at higher prices later.
Stock traders study the technical attributes of a stock to predict which direction a stock will go over a short course of time. Will the stock go up or down?
They aren’t interested in the long-term potential of a company as are investors.
Stock traders are looking for ways to take advantage of the market ups and downs along with how a stock performs over a period of weeks, days, hours, or even minutes.
In addition, they also take advantage of mispricings in the stock market. Some events, whether political or others, can drive these mispricings, influencing a stock’s price.
Traders closely monitor these happenings in the market to gain maximum leverage from the fluctuations.
If trading appeals to you more than investing, you should open an account at Webull. It’s one of the most trusted online brokerages with no commissions or account minimum.
Plus, you get 2 free stocks just by opening an account with them.
What Are Stock Brokers?
You can’t buy stocks at the corner store. They are bought and sold through licensed professionals called stockbrokers, and the firms they work for are known as brokerages.
All financial market transactions must take place through a stockbroker. Now, these stockbrokers aren’t necessarily middle-aged men in crisp suits only found on Wall Street.
Thanks to the internet, you’re just a click away from the right brokerage.
At Minority Mindset, we recommend using Webull or M1 Finance – free stock trading platforms with pristine reputations.
Although both platforms are beginner-friendly and allow you to start investing quickly, even on a small budget, Webull is better for active investors, and M1 Finance is better suited for passive investors with the option to purchase fractional shares.
How Do You Make Money From Stocks?
Successful stocks earn their owners (called “shareholders”) a profit through appreciation and dividends.
Appreciation happens when your stocks increase in value, allowing you to sell them at a profit.
Imagine you purchased a thousand stocks at $100 apiece. Over time, your stocks go up until they are worth $200 each. You could cash out and sell your stocks for $200 each — congratulations — you earned $100,000!
Or, you can reinvest your earnings and try to get that $100,000 to earn even more money.
When a company is doing well, its board of directors distributes a portion of its earnings back to the stockholders on a quarterly basis. They can be paid in cash or by providing additional stocks to shareholders.
- Cash dividends return cash to stockholders.
- Stock dividends give more shares to stockholders.
Reinvesting dividends, over decades, is how people like Grace Groner and Sylvia Bloom ended up as multi-millionaires, even without big salaries.
How To Avoid Emotional Stock Investing?
The stock market is a place where investors go to bet their money on what they think will happen in the economy.
The unpredictability of the market can be a major emotional trigger that could lead you to bad financial decisions and acting impulsively. So you need to learn to avoid these emotional traps and rely on facts and logic.
And if you can’t control your emotions, maybe it’s best to hire a financial advisor that will rein you in when necessary.
Please note, the following example is for educational purposes only.
DRIP buying is a strategy that can help investors make rational buying decisions, even when the stock market becomes highly emotional.
DRIP stands for Dividend Reinvestment Plan.
As the name suggests, the cash dividends that an investor earns after investing in the stocks of a company are reinvested to buy more shares.
It’s how an investor can increase their investment in a given company by buying shares directly from the company itself, without actually putting in any more outside money.
The shares are bought from the company’s own reserve as opposed to from the stock exchange. So a DRIP eliminates the need for investors to pay any brokerage fees.
In essence, a DRIP allows investors the opportunity to purchase additional shares at a lower cost. In addition with the help of the dollar-cost averaging technique, the price of the stock is averaged out.
For example, if you keep a list of the companies you’d like to invest in, and the economy takes a nosedive, you might ask yourself “Which of these companies are still going to be a good investment 10 years from now?”
You might consider purchasing some shares from those companies when the market drops and their share prices go down.
Then, if stock prices drop even lower, you might purchase a few more shares of those companies. By staggering, you avoid “going all in” and losing all of your money when emotions enter into the picture.
One crucial tip for stock market investing for beginners is to never treat the stock market like a Las Vegas casino.
Instead, develop a plan for how you’ll handle your investments when emotions come into play, tempting you to go for a “big win” or pull out entirely due to fear.
How To Start Investing In Stocks – The Basics
Investing in the stock market is easier than you might think. However, before you begin investing, you should consider your:
- Debts: You shouldn’t be investing money if you need to pay off major loans with an interest rate that’s higher than the one you could gain with investing.
- Budget: Figure out how much leftover do you have after all the monthly expenses and emergency saving
- Risk tolerance: Ask yourself, how much are you willing to lose? The amount of investment shouldn’t be more than the amount you’re ready to lose.
Once you’ve completed these three steps, you’re ready to begin investing in the stock market.
Decide Whether You Want To Invest Actively Or Passively
The very first step a beginner can take when investing in stocks is to decide between passive and active investing.
Passive investors usually allow their investments to build wealth over time. You won’t be trading on a daily basis so it takes very little time.
Active investors buy and sell stocks based on when they think shares will rise and fall. Active investing requires a lot of involvement and often takes years to master the concepts.
However, no amount of mastery or understanding guarantees wealth or promises that you won’t lose money.
Find A Stockbroker i.e. A Brokerage
For getting started in stocks, you need a stockbroker to be able to buy and sell stocks. And to make the decision, you need to know what types of brokers are out there:
- Full-service stockbroker: Probably the most expensive of all, these are usually the old-school brokers with physical offices, and their own investment banking, research departments, and access to ICO
- Discount stockbroker: They come at a lower rate than the full-service and offer similar services, more suitable for the active traders.
- Online stockbroker: Our favorite – just like a full-service brokerage but faster, cheaper, and more accessible to everyone and everywhere.
When it comes to online brokerages, we can’t recommend M1 Finance enough.
At M1 Finance, you choose the companies or funds you want to invest in. And, if you want to invest in one of your favorite companies whose stock prices are too high, you can purchase fractional shares instead of full shares.
Or, you can choose from professionally-designed pies to meet specific goals and risk factors or even invest in a particular industry.
Once you’ve started investing in the stock market, you’ll want to continue investing on a steady basis for many years.
The more money you invest, and the longer you keep your money invested, the more money you’ll earn.
Consider automating your investments, so you contribute a specific portion of your income every month.
Stock Trading Basics – Final Thoughts
Once you wrap your finger around the stock trading basics, it all starts feeling less intimidating.
And with proper management of your budget and an understanding of how the stock market works, you can build significant wealth even with a regular paycheck.