Rising stock prices have encouraged many people to consider investing in the stock market. However, just as many people find the process of buying, selling and trading stocks intimidating. The good news is that it need not be intimidating.
Most people believe that they need elaborate algorithms and secret formulas to be successful. But the truth is that you need not be a genius to invest in the stock market. Here are a few basics.
Learning the terminologies
Among the first steps to learning how to trade online is familiarizing yourself with the language of the trading. You will come across terms such as trading on margin (borrowing money to trade) and limit orders (setting a purchase price). Keep in mind that, as you begin learning how to trade, you need not worry too much about memorizing the terms.
As a novice investor, start by doing simple transactions on the securities market rather than trying to jump straight into the complex transactions. After becoming familiar with the basics, you can gradually learn how to carry out increasingly complex trading activities.
In the past, new investors joined investment groups or clubs that met for breakfast in order for the experienced investors to share knowledge with the new ones. Nowadays, there are easier options, such as joining social media groups or online forums for the purpose of receiving investment education and finding a mentor.
In addition to that, there are a number of well-established formal online investment academies where you can receive training. Together with mobile investment apps and practice accounts that simulate live trading, these online resources can make the learning process easier for a beginner.
Picking the right stocks
During the initial stages of your investment career, your top priority should be research on choosing the right stock to purchase. Price-earnings ratios and annual reports of companies provide you with good information about the stocks you should buy. Give preference to industries and companies that you understand well. For example, if you’re a doctor, consider medical device companies.
Even though you may be keen on owning a piece of top blue chip companies such as Microsoft and Apple, keep in mind that you need not purchase the individual stocks of these companies. Index funds are a good option for new investors.
Index funds are usually offered as exchange-rated funds or mutual funds, bringing together numerous stocks in a single fund for the purpose of mimicking the returns of indices such as the S&P 500 and Russell 2000. Each index monitors a specified part of the stock market. The NASDAQ composite, for example, tracks only tech firms whereas the Russell 2000 tracks small companies.
Buying at the right time
As soon as you identify the good stocks, don’t be too quick to buy them. According to stock market experts, the reason Wall Street consistently makes profits while the average investor typically loses is that Wall Street investors hold out until a good stock reaches a good price before buying it. Average investors buy the stock when the price is high.
One of the most common traps you may fall into as a new investor is fixating on stocks for which the news is good. The truth is that, by the time the stock makes it to the news, all the smart investors have already bought it. The result is that novice investors buy good stocks when the price is at its peak. So, follow the stock price rather than the news.
Buying at the right place
Another important aspect of investing and trading stocks is where you do it. Some experts recommend starting with your bank because you already have a good relationship with it and the bank probably already has a stock brokerage department. The setup process should therefore be smooth and quick.
Using the guidance of a bank’s stock brokerage team as you learn about trading and investing will make the transition from novice to intermediary easier. If you opt for a broker other than trading through your bank, make sure that you research prospective brokers well to identify one that is not only highly experienced but also offers their services at affordable rates.
Stock investing versus trading
The main difference between a stock investor and a stock trader is when they sell their stock. Stock investors buy stocks and hold on to them for a long time whereas stock traders sell their stock shortly after purchase in order to turn a quick profit. As a beginner, it is advisable to start by holding on to shares for hours or days before trying live trading. Start live trading only after you gain a bit more market experience and read numerous insightful trading articles.
If you’re like many new investors, one of the most confounding aspects of investing and trading stocks is understanding stock-related taxes. You are required to pay a 15-20 percent capital gains tax if you hold on to a stock for more than a year before selling it. Profits you make from selling stocks less than one year after you bought them are taxed similarly to your other income.
There are measures you can take to lower your capital gains tax burden. One of them is rebalancing the dividends you receive for your stocks. Dividends can be taxed in the same way as capital gains depending on whether or not they are qualified.
Qualified dividends are those that are received from investments that you hold for a specified period and can therefore be taxed similarly to long-term capital gains. On the other hand, nonqualified dividends are taxed in the same way as short-term capital gains; in other words, they are taxed similarly to your ordinary income.
There is no reason why you shouldn’t learn to invest or trade in the stock market if you’re interested. And the good news is that you don’t need a lot of money to start. You can start with as little as $1,000. Still, remember that you need to learn how to choose the right stocks and be prepared for the challenges that typically face new stock market investors. With diligence in learning and using the right investment strategy, you can make good profits both in the short and long term.
Steven P. Dunn has worked as finance blogger in the investments industry for 13 years and has written numerous trading articles and blog posts on topics related to trading and investing in the stock market.