Ben Todd | Jun 2, 2017 | 1
Beginner’s Guide to Stock Market Investing
There is no such thing as a get-rich-quick scheme unless you are willing to do something illegal. The stock market is not going to make you rich. It is true that some people become rich because of the stock market, but they are usually people who already have hundreds of thousands to invest.
It is also true that some gamblers become rich, and many investing principles are similar to gambling principles. It is just as possible to become rich gambling if you use investing principles. The only difference between gambling and stock market investing is that you need less to gamble, and the offset is that gambling may result in more comprehensive losses. Professional gamblers will even balance their books using the same principles that stock market investors use.
Here’s our beginner’s guide to investing on the stock market. This should contain everything you need to know before you tip your toes into the stock market.
What Are Stocks And Shares?
A share is like buying a piece of a company. If you buy a single share of a company, then you own a certain percentage of it. If a company is made up of 10 shares, and you own 5 shares, then you own half of the company. Stock is what we call shares if you are referring to more than one company.
Stock is a more general term to describe ownership of certificates in a company. Shares refer to ownership of a certain company. You could say that you have just bought stock in several pharmaceutical companies, or you could say you have bought shares in a single pharmaceutical company.
A share price is the cost of each share. A company may have 300,000 shares, and each share costs $1 each, which means you could buy and own the company for $300,000.
Insider Tip: Stock market tips are useless because by the time you read them they are already out of date.
What Types Of Stocks And Shares Are There?
You may hear terms such as mid-cap, small-cap, and large-cap or Blue chip shares. They are all stocks and shares. What they are actually referring to is a description of the company itself.
For example, if you buy shares in a very small company, they may be called small-cap shares because the company is small and their share price is low. If you buy shares in a company that is well established and has a high share price, then people may say you have bought shares in a blue-chip company. You may also hear people talk about growth shares and income shares. They are discussed later in the article.
Insider Tip: Mid-Cap are for long-term investors that do not want too much risk. Protect your money from inflation with Blue-Chip shares. Take a risk with small-cap shares.
How Do You Buy Shares?
You first need to find a broker. These days, you may be able to use your bank as your broker. Better still, if you have online banking, they will allow you to create the orders online and they will execute them for you. Otherwise, you are going to need a broker, and this is a person (company) that takes your money and buys the shares for you, and in return, they get a flat fee or a percentage fee. It is often better to deal with a company that has a flat fee because percentage fees can significantly eat into your larger trades.
Remember that the companies you choose are probably going to sell the shares for you too. You need to be sure that their selling fee is not massive. Most will charge the same to buy as they will to sell, no matter how big the transaction. You should also remember that if a company charges a percentage to sell–that they may take a large bite out of your profit.
If you have an online account, such as with the HSBC bank, then they will charge you a fee to keep your investing account open. They will charge you a flat fee to make trades, which means they charge you a flat fee when they buy and when you sell. They have an interface that allows you to search through all the stocks you may buy through them. You determine how many you buy and you see how much you may buy them for. You may also give the system instructions to sell or buy at certain times. You click to order the shares and they buy them for you within 24 hours (usually). They then draw the payment money out of your current account a few days later.
Insider Tip: Recommendations from people you know are valuable when it comes to hiring brokers. Check their online reputation for signs that they mess you around or charge too much.
How Do You Sell Shares?
If you use an online broker, a real life broker, or a bank, then selling should be easy. You should be able to sell as easily as you were able to buy. They should also give you a quote for how much money you will receive back based on the current share price.
You may be wondering why your buying price is a little higher than the market value, and why your selling price is a little lower than the market value. Sadly, that is just the way it works.
For example, you may see that a share price is 100.00, which means each share is worth one dollar (one hundred cents). However, when you buy, you may have to buy for 112.00, which is $1.12 per share. If you were to sell and the share price was 100.00, then you may have to sell for 90.00, which is 90 cents. When you are thinking about selling, double check how much your shares will sell for because it may be less than you think.
Insider Tip: if you instruct a broker to sell when a share price goes too low, you may end up making a loss just because a company was experiencing a temporary extra-low trough.
How Do You Make Money From Shares?
You can make money from growing your shares or by getting paid dividends (or both). It is not as confusing as it sounds.
Making money from growth shares works like this. You buy 8000 shares at 15.00, which is 15 cents each, which is $1200. You wait three years and the share price goes up from 15.00 to 21.00, which is 21 cents per share. You sell your 8000 shares for $1680.
Here is the same thing again:
- Buy 8000 shares at 15c each = $1200
- Wait three years
- Sell 8000 shares at 21c each = $1680
That is how you make money from growing your shares. Shares that cost less than one dollar are called penny shares or small-cap shares. They are the most risky because they are for small companies that may easily go bust. However, if they do not, they are also likely to grow a lot faster than mid-cap and blue chip companies. Many people choose mid-cap shares because they are for established companies and yet still have a little growth in them.
When you buy stocks and shares, you are buying a bit of company. Some companies will pay you a dividend, which means you get money for owning shares in the company. It is very easy to make money with companies that pay dividends because all you have to do is hold on to your shares and they pay you a certain sum every now and again. If you are lucky, then the company’s stock price may go up, so that you may also sell your shares for a profit in the future too.
Insider Tip: Do dry runs, which are called “paper bets” in the gambling industry. This is where you note down a company’s details and write down how much you “would” have invested right now depending on how much you have in your bank account. Instead of actually buying, you just write that you did. Look at your paper every month and check the company you wrote down to see how well you would have done.
How Long Should You Have Your Shares For?
There is no set limit. At the age of 21, you could buy shares in a company for $1000, and then keep them until you retire at the age of 71yrs old and sell them for $450,000. There is no limit to how long you should keep your shares for. If you hold onto your shares for longer, then there is a bigger chance you will make a profit on them. However, the company may go bust at some point, which may mean you lose all your money.
Some shares may have a sharp rise, at which point some people like to sell before the price falls again. Some people like to check their share prices every day to see if they can sell while a company is on an unexpected upswing. Other people treat investing in shares like a savings bank, and they only go back to sell if they think the company is going to go stale or fail.
Insider Tip: If you do not have an income, then investing is not for you. It is a place to put your excess cash so that it can grow. You may struggle to exist through investing alone.
Long Term Profit Or Short Term Profit
Disclaimer – these are just ideas. This should not be considered as financial advice in any way.
If you have less to invest, then penny shares are for you. Risk $1000 here and $700 there and check on your investments every day. Sell when they have sharp upswings, and ride it out if their price doesn’t move for a long while. Get in and get out while you can and hope luck is on your side.
If you have a long-term investing plan, such as saving to buy a house or for your kid’s college education, then buy these shares and keep them for years until you need the money. Check on them every now and again to check for worrying changes. Place a sell order on them that sell them if the price falls to a certain number. Do not set it too close to its current price, or you may end up selling during a temporary trough.
If you are building wealth, then your portfolio should include a portion of blue chip companies. They will help you save your money while beating inflation, and if you can find them that grow to beat inflation while also paying you dividends, then you are on a winner in the long term. These are companies that shouldn’t go anywhere unless there is another global economic downturn, so they are fairly safe long-term investments.
Insider Tip: Long-term investors are typically the most successful. If you cannot stomach a share price that doesn’t move for five years, then you may not have the stomach for stock market investing.
How To Test The Water To See If Investing Is For You
If you are an absolute novice, then you need to pay off all your debt first. There is just no two ways about it, unless your debt is a mortgage payment or student loans. The reason is that the interest you are earning on your shares and such is less value than the interest you would save if you invested your money into your debt.
Start by investing your money into a flexible saver that pays you interest every month. If you can keep your money in that without spending it, then you may have what it takes to be an investor. Ideally, you need to save up to $1000 or more.
Pick a broker or do it online with your current bank. While you are saving, you should watch the markets. Write down a few companies and their prices and watch them to see if they move. Look into the history of a company, see how well it is doing now, and watch its price for a while.
Start with the riskier penny shares because you will able to buy more of them with your $1000. Plus, if they go up just a little bit, then you may be able to sell for more than you paid (plus buying and selling fees) so that you make a profit.
Insider Tip: Just because stock market investing didn’t work out this time doesn’t mean you cannot try again later on in life. Your financial situation will probably change numerous times during your life, and you may be more successful next time you try.