Investing in stocks can be an excellent way to grow your wealth over the long term. It is also fair to say that many people are intimidated by the stock market and may not know where to begin.
In this beginner’s guide, you will receive an introduction to trading stocks and provide some of the essential basic information required to help you get started with your first transaction.
What Are Stocks?
A stock represents ownership in a company. When you purchase a share of a company’s stock, you essentially buy a small piece of that company.
Companies issue stocks to raise capital, and investors buy and sell those stocks on stock exchanges. The price of a stock is determined by supply and demand in the market.
Types of Stocks
There are two primary types of stocks: common and preferred. [1]
Common stocks are the most traded stock type in most markets, representing ownership in a company. The stockholders can vote on important company decisions and may receive dividends if the company is profitable.
Preferred stocks are a type of stock that pays a fixed dividend, and they have priority over the common type in the event of bankruptcy.
Here are some additional stock-trading options to include when looking for ways to expand your portfolio with this asset.
- Blue-Chip Stocks. This option is for large, well-established companies with a long track record of stable earnings and dividends. They are typically considered to be a safe, long-term investment. [2]
- Growth Stocks. These are from businesses expected to grow faster than the overall market. They don’t generally pay dividends, but their potential for capital appreciation can make them attractive to investors.
- Penny Stocks. This option involves small companies that trade for less than $5 per share. Penny stocks are generally considered high-risk investments, as they can be highly volatile and often subject to manipulation. [3]
- Value Stocks. Traders choose this option because they typically have a low price-to-earnings ratio and a high dividend yield. The companies in this category are often considered to be undervalued by the current marketplace.
Although not technically stocks, you can add bonds, mutual funds, and ETFs following a similar process when trading. It is essential to have a diverse portfolio to ensure growth can occur, even when the overall market is down.
How to Trade Stocks
To trade stocks, you will need to open a brokerage account. A brokerage account is a type of investment account that allows you to buy and sell stocks. There are many different brokerage firms to choose from, and each has fees and minimum balance requirements.
It’s essential to research different brokerage firms before opening an account to find one that meets your needs.
Once you have opened a brokerage account, you can begin trading stocks. You can buy and sell stocks using the brokerage’s trading platform after funding the account. This step usually involves transferring money from a bank account, wiring cash, or depositing a check.
When you purchase stocks, the easiest way is to buy them at the current market price. If you sell them, you can sell them at the current market price. A limit order changes that dynamic by letting you buy or sell stock at specific prices. [4]
What Are the Risks of Trading Stocks
It’s important to remember that trading stocks comes with risks. The value of a stock can rise or fall, and there are no guarantees that you will make a profit. [5]
It’s essential to have a long-term investment strategy and to diversify your portfolio to minimize risk.
Researching and investing in companies you believe will help you reach your financial goals. Please remember to monitor your investments to ensure they perform as expected.
Market, company, and liquidity risks are part of this investment strategy. A stock’s value can rapidly fluctuate based on numerous factors, including economic trends, political activities, and company-specific news. Prices can change quickly, so you must be prepared to initiate quick decisions at times to preserve your gains.