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The world of stock trading looks exciting on TV as traders watch computer screens intently, waiting to buy and sell at the perfect time to reap massive profits. But the reality behind the stock market is a little less action-packed.
As a beginner, watching the New York Stock Exchange (NYSE) highlight reels and the Nasdaq can seem intimidating, but you want in on the excitement. Here, we’ll guide you through the basics you should know before you try to navigate the complexity of the stock market.
What it means to invest in the stock market
The term “stocks” refers to shares of ownership in a particular company. These shares are for sale on an exchange such as the Nasdaq or the NYSE. There, the supply and demand of the stock is monitored, and the price adjusts according to these factors.
Buyers and sellers are the market for company shares, and the stock market is an accumulation of all exchanges, with the two mentioned previously being the most commonly known. Investing in the stock market means buying stocks listed on an exchange.
Rather than dealing with the exchange directly, most people pay a broker to do this on their behalf. They place their trades through the broker, who then navigates the complexities of buying and selling for them.
Terms of the trade
Depending on your portfolio goals, you may be able to hire a broker who will handle all the details for you without learning anything more than the basics of investing. This article by OJM Group is a valuable resource that explains the nuances all beginner investors should know.
However, learning the terms is beneficial if you want to invest in long-term gains. Here are some of the key terms you should know before beginning your trading journey:
- Market index: This term refers to the performance of a group of stocks. The group can represent the whole market or a certain industry, such as retail. Market indexes are often based on the Dow Jones Industrial Average, the Nasdaq composite, or the S&P 500.
- Up and Down: When the stock market is “up” or “down”, this typically refers to one of the indexes of the major markets.
- Benchmark index: To monitor the strength of your portfolio, you can look at the index of your stock. This number would help you benchmark its performance and guide your decisions to buy, keep, or sell.
- Exchange-traded or index fund: These terms track specific sectors or indexes in the market.
- Direct indexing: A new strategy in investing, this term will show up frequently because it’s an exciting innovation in finance. This type of investment is designed for those who have significant assets that are not sitting in retirement accounts. For more on this strategy, read this article by OJM Group.
You’ll also hear the phrase “diversified portfolio” as the ultimate goal because when you use various types of investments, you’re more likely to outlast the volatile ups and downs of the market. However, diversifying will expose you to many other terms that may be unfamiliar to you at first.
Let’s look at what you will see should you become actively engaged in stock trading.
Timing is everything in stock trading
Have you ever seen a company skyrocket to success and wish you’d gotten involved in their stocks while they were still new? Sure, you could buy now, but the supply is low and demand is high, making the prices less likely to bring you a large profit.
Those on the ground floor of stocks like Berkshire Hathaway started with minimal investments and made massive profits. They were in the right place at the right time and made the decision to buy.
Whether it’s for buying or selling, timing matters in stock trading. When you have experience reading the trends or hiring a knowledgeable broker, you can watch and wait for the perfect time to get in or out of a company’s stock.
Traders aim to buy low, sell high, using short-term market changes to make a profit. They may be day traders, buying and selling throughout the day, or active traders who place dozens of trades monthly. Either way, professional traders research past, present, and future trends to analyse the potential profitability of a stock.
Bulls, bears, and crashing markets
Within the analysis of a stock lies the concern of bull and bear markets. Bull markets refer to a period of confident investment and economic growth. Bear markets, on the other hand, are fearsome, referring to stock prices that fall significantly across multiple indexes. (Note that the threshold of a bear market percentage can vary, but it’s usually 20%.)
A bull market is followed by a bear market, which is followed by a bull market in a cyclical economic pattern. When you see a bear market, it means the economy is likely to slow down, while a bull market signals a growing overall economic trend. The bull market usually outlasts the bear market, so traders must know when to sell or buy versus when to hold out for the return of the bull.
However, investors in the stock market must always be aware that there’s a possibility of a crash. This happens when stock prices drop suddenly and substantially. It’s different from a correction, which refers to a drop of 10-20% in the stock market.
Conclusion
Investing in the stock market is a test of patience and skill. You must know when to hold onto your stock and wait for the bull market to return or when to get rid of no longer valuable stock. With the help of skilled brokers and investment companies, you can create a diversified portfolio that will outlast the downtrends and bring you a long-term profit.
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