The Basics of Investing in the Stock Market

The Basics of Investing in the Stock Market By Clayton Richard - November 29, 2021
The Basics of Investing in the Stock Market

The Basics of Investing in the Stock Market

When you invest in the stock market, you are actually buying equity or a piece of ownership in the traded company. According to the Street.com, the two main types of stocks traded on the stock market are common stocks and preferred stocks. Shareholders with common stocks enjoy a number of benefits such as voting rights, but no dividend payments. On the other hand, the holders of preferred stocks are guaranteed dividend payment, but this may not be reciprocated with voting rights. Exceptions may apply depending on the rules governing stock ownership. Stocks and other securities like bonds and derivatives are traded in the stock exchange market.

Some of the largest and most capitalized stock markets in the world are the New York Stock Exchange (NYSE), NASDAQ-US, Japan Exchange Group and Shanghai Stock Exchange. The top ten list also includes the London Stock Exchange (LSE), Euronext and the Hong Kong Exchanges. The market brings together the companies and investors who own the shares and potential buyers. The shares trading in the stock markets are normally listed through the Initial Public Offering (IPO). During the offering, public and private investors are invited to buy the liquidated company shares. The listing gives the listed companies a number of benefits, among them:

• Greater market visibility

• Opportunity to invite larger Institutional investors

• Opportunity to raise capital

• Portfolio diversification strategy

• A chance to attract new talents

The companies listing on the stock market use a number of strategies to set the initial share price. The most widely used is the auction process, where bids are placed by sellers and buyers before the final price is agreed. The prices of shares listed may fluctuate based on the prevailing trading atmosphere and factors beyond the company’s control. During trading, investors can measure the performance using metrics like the Price/Earnings ratio or PE ratio. If you are keen on investing in shares, consider using online brokers, robo advisors and employer deductions. Stock brokers offer an array of services, including financial advice and asset management services.

The brokerage market is dominated by full service and discount brokers. Full service brokers offer all the traditional brokerage services while discount brokers are mainly focused on giving investors valuable tools and strategies to trade on the market. As part of education and training, online discount brokers will furnish you with vital stock training modules and tailored mobile apps. These tools are normally provided at an agreed one-time or monthly fee. If you choose to invest on the stock market through your employer, a percentage of your wages will be deducted and submitted to instruments like the 401 (k) and other specified retirement savings schemes.

Basic Factors To Look For When Buying Shares

Before buying any stock, you need to perform some research on the selected portfolios. The stock market is inundated with many stocks, including those with high and low growth potential. Buying a promising stock will give you good value for money and other benefits like regular dividends. According to US News, investors considering the stock market as an investment strategy need to pay attention to the following key aspects:

Dividends – the dividend declared by the listed company signifies stability and optimism. While looking at the current dividend declarations, you also need to analyze how consistent the selected company has paid dividends over a span of years. This analysis is crucial since companies may use high dividend declarations to simply capture the attention of investors or cover internal shortcomings like on insufficient investment.

Stability – stock trading is characterized by high volatility, especially the day-to-day trading. To find a promising stock to purchase, always focus on the long term gain. You can analyze long term stability of a stock by studying the trend lines over a given time. A good place to start is choosing a stock with a steady, rising stock price. The stability factor can also be analyzed by assessing how well the company maneuvers around downturns and tough market.

Price-Earnings ratio – the PE ratio indicates how the stock price is performing relative to the earnings made. This indicator is arrived at by dividing the current share price with earnings per share. For instance, if a company’s share is trading at $50 a share and the earnings per share is set at $3.00, the P/E ratio will be $16.67. A higher PE means positive growth potential. Before making a commitment, you need to make PE comparisons from a list of preferred company shares.

Earnings growth – earnings growth is another pointer to a stable stock. As an investor looking for best stocks to buy for 2019, it is vital to pay attention to the company’s growth earnings to capture the gains or losses accrued over time. Even small, gradual gains made over a lengthy period can be sufficient reason to buy a stock.

Relative strength in the industry – as a prospective stock market investor, you need to scrutinize the industries represented by the chosen companies. The fastest growing industries at the moment include; cyber-security, renewable energy, virtual reality and biotechnology. Once you are done with the assessment, you need to discern elements like future potential and competition to effectively pick a winning stock.

Debt equity ratio – a growing number of companies, including Fortune 500 firms now use debt-equity ratio to measure the stock’s attractiveness. The ratio is calculated by dividing the total liabilities listed on the company balance sheet with the overall amount of shareholder equity. Following this guide, it may be advisable to forego shares of companies with high debt levels compared to listed equity. Although the ratio varies from one industry to the other, investors keen on maintaining low risk should be comfortable with a debt-equity ratio of 0.3 or lower.

Management – well-managed companies usually have trusted management teams. This attribute generally portrays stability, which often reflects on the stock performance. For a more complete outlook, also find out if there are any scandals that may impact negatively on the stock price or change your decision to buy stock.

The process of learning the best stocks to buy takes time and a lot of effort. Beginners need to know when to buy and offload stocks. The main rules of selling are the offensive and defensive rules. The former will help you tie up accumulated profits while the defensive option helps curtail further loses. Once you know what to do and are able to make the right calls, the rewards can be huge. Besides the volatile nature of the stock market, there are other downsides to consider when investing in stocks. These include stiff regulations and high listing fees and associated costs. You can learn more about stocks and stock trading through stock brokers and online resources.

By Clayton Richard - November 29, 2021

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