A beginner’s guide to investing in stocks

Jack Davis

Writer of ISF Dgital

 


The stock market is a daunting proposition for new investors. According to industry sources, there are some 2,800 companies on the New York Stock Exchange (NYSE) with approximately 1.46 billion shares traded daily. As the world’s premier stock market, the NYSE is the benchmark against which many other bourses are compared.

Luckily, there are now options aplenty provided by fintech companies. While the stock market can seem daunting, novice traders can find platforms to learn and trade. Picking the right options is another matter, of course. But trading platforms have opened up the stock market to millions who never had access before.

Stockbrokers, institutional traders, day traders, and everyday investors buy and sell hundreds of billions of dollars of securities every day on the NYSE. This demand/supply continuum fuels the global economy through its multiplier effect on the world’s most successful companies.

INVESTING IN STOCKS

 NASDAQ is the world’s leading tech exchange. Source: shutterstock.com

The NASDAQ (National Association of Securities Dealers Automated Quotations) is the world’s leading tech exchange. Some 3,300 companies are listed on the NASDAQ, including Apple Inc, Google, Facebook, and Microsoft. Some 1.8 billion trades take place on the NASDAQ on a daily basis. At current levels, the NASDAQ is the most heavily traded stock exchange in the United States, eclipsing many other markets. The steps that need to be followed when learning how to invest in stocks necessitate a careful and methodical evaluation of your personal preferences.

First of all, you need some sort of base capital. Ideally, you will have cash that you can afford to lose, perhaps following the mindset of someone going to a casino. You can get a competitive personal loan rate, especially in this climate of cheap money in light of Covid-19 and central bank action, and there are other financing options available. However, you should think very carefully about what you have, what you can get, and what it means if you lose it.

Your decision to dabble in the stock market must then be weighed against several factors, notably your risk profile, your investment timeline, your knowledge of the market, and your preferred choice of stocks. Naturally, many peripheral issues come into the equation based on individual preferences.

A good point of departure is your appetite for risk. Fortunately, investments in stocks cater to low-risk investors (risk-averse), medium-risk investors, and high-risk investors. The age-old aphorism, no risk, no reward, invariably holds true with stocks. If everyone was guaranteed to receive dividends and fixed-interest returns ad infinitum, there would be zero risk of loss, and the economic system would be unsustainable.

What types of stocks interest you?

Once you have evaluated your personal preferences, it is possible to put together a listing of potential stocks for investment purposes. Stocks, by their very nature, are risky propositions. If you are averse to risk in its entirety, your best bet is a fixed-interest-bearing savings account such as a certificate of deposit.

You may even want to consider a negligible-interest-bearing bank account, or simply stash your money under the proverbial mattress and hope that inflationary bugbears don’t whittle away its real value. On a realistic note, it’s best to mix up your stock portfolio to include a combination of investments that best match your preferences. If you seek aggressive growth, then high-growth stocks such as tech stocks are your forte. If you are seeking low to moderate risk, then established blue-chip companies in their mature phase are preferable.

Below is a small sampling of low-risk, medium-risk, and high-risk stocks available for investment purposes:

  • Low-Risk Stocks – low-risk stocks are typically low growth stocks that tend to maintain their value and their pricing irrespective of market volatility. Many examples abound such as the energy giant, Exxon Mobil, with the ticker XOM, Procter & Gamble with the ticker PG, and Hormel Foods with the ticker HRL.
  • Medium-Risk Investments – medium-risk stocks are moderate-risk stocks, which include ETFs such as the Invesco SmallCap Low Volatility ETF (Exchange Traded Fund), the Vanguard Real Estate Fund ETF Shares, and the SPDR S&P 500 ETF.
  • High-Risk Stocks – high-risk stocks and investments include a broad spectrum of options, including biotech stocks, pharmacology stocks, technology stocks, and recently-listed stocks. Newly-listed companies have no track record as public companies, and prices are largely the result of hype with IPOs. These can whipsaw wildly over time.

What does your investment timeline look like?

INVESTING IN STOCKS

What does your investment timeline look like? Source: shutterstock.com

Your investment timeline is a really important measure of how you will approach the stock market. If you are young and in your prime, you can afford to be more aggressive in the type of stocks that you pick. You have a much longer investment timeline to generate returns. As such, you’re more likely to opt for a moderate-to-aggressive portfolio. Once you are married with kids, your investment objectives change. You may be wanting to generate returns for college tuition, family vacations, a down payment on a new home, or paying off an existing home within a set period of time.

Your investment timeline moves from the long-term to the medium-term. As you get older and move towards retirement, you certainly don’t want to be investing for the long-term. Plus, older investors are not looking for risky investments. At this stage of the game, you are no longer a productive member of the economy and are likely looking to use your savings and nest egg for retirement purposes. Conservative investing practices are the order of the day. Of course, there are outliers in the mix. You can always adopt a conservative approach at a young age, and an aggressive approach as you get older – it depends on your preferences, your personality, and your personal financial situation.

Choose a reputable broker

The quality of trading brokerages differs markedly, primarily due to the fine print. It is imperative that you conduct due diligence when choosing a platform for trading or investing in stocks. Do they offer demo trading accounts? Do you have the option to trade stocks CFDs (derivatives trading instruments) where you trade contracts that mirror the price movements of the underlying asset, without owning the stocks themselves? What about margin and leverage? Do the trading platforms offer technical and fundamental analysis tools and resources? Are there trading guides, trading articles, economic calendars, and economic indicators available? What about mobile trading functionality? These are all important elements to consider. However, fees, commissions, monthly charges, and costs pertaining to account maintenance must also be factored in.

Now that you have a broad understanding of what it takes to invest in stocks, you can confidently start picking your stocks, setting a budget, and making that trade!

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