There is no specific phobia of the stock market, but we all know that it exists.But are these fears qualified? Are these not just a result of misconceptions about the stock trade?
There are so many claims about how people ended up in dire situations after they invest their wealth in stocks. Yet the question still hangs: are the stories enough for you to move away from stock trading, when a lot of people who have had the money to invest are still relishing and reaping the fruits of investing?
The basics of stock
Business experts would like you to think that investing does not automatically mean losing money. Yes, you may lose some, but a better understanding of stocks, the stock market, buying and selling along with the whole trade would make you a better investor.
Even basic knowledge of the stock market can go a long way, and help you decide whether you can handle the demands of trading — and if yes, enable you to make strategic moves in navigating stock exchanges, without overthinking that you might make wrong decisions.
The definition of a stock is simple: it represents a part in the ownership of a corporation’s assets and profits. So if one has individual stocks worth 60 percent of the corporation, then that individual or company is surely the majority owner because they control a huge chunk of its assets and profits.
If a company decides to divide its ownership by 500,000 shares — or basically stocks broken down — and an investor gets 100,000 of these, then that means he or she owns 20 percent of the company.
Many corporations are publicly-listed, or a state where companies or its stockholders open a part of their shares for sale to individuals not part of the company’s structure.
Some companies open shares to allow more money to flow in, so that they can generate capital for projects and investments in the future. That is where the stock market or a stock exchange enters: basically, it is where shares are bought and sold.
Trading happens in two initial steps: first, a company sells its stocks to investors within the company, or primary market. When these investors sell their shares to the public, it becomes the secondary market, or the common trading we see.
While prices in the primary market have been premeditated, those in the second market are dictated by various economic principles, like the law of supply and demand.
Law of supply and demand dictates that if demand is high, prices will go up also and if demand is low, prices will go down. This also applies to the stock exchange: if a company is on the rise, therefore more would purchase shares, which increases its value.
But if a company is underperforming and has several liabilities on its hand, then some would pull their shares out, which would lead to share prices declining.
How can you make money in stocks?
There are various reasons why a person would buy stocks — but the most obvious of which is making money. If you purchase individual stocks, you own a part of the company and are entitled to dividends.
Dividends are paid to people with individual stocks, when the company’s income increases or if there are excess earnings, in proportion to how many shares a person owns. This usually happens on a quarterly basis.
Others engage in buying and selling stocks to make money. But how can a person make money from that?
Imagine buying wine from the 1970 for just around $5 dollars. As wine is a product that generally tends to get more expensive over time, a bottle’s price in 2020 may skyrocket to $15 dollars.
If demand is high for the good, old wine, then you can earn around $10 dollars per bottle. Yes, $10 may seem like a small amount for over 50 years of waiting, but what if you have 10,000 bottles of this wine? Or 100,000 bottles?
Then you may make money to the tune of $100,000 and $1 million.
Like the increase in the wine’s prices, this may happen also to buying stocks — it follows the general principle of “buy low, sell high”, or buy stocks when they are priced lower, and have them sold once prices go up.
So how to money invest? There are two ways of doing it: first is day trading, which is buying and selling shares within the day and relying on fluctuations in stock prices. The other is long-term money investing, which as the term suggests, is placing money on the stock and holding them for months and even years.
The example above — selling wine after 50 years — is an exaggerated way of explaining long-term investing. Using this case, day trading may be best exemplified by selling wine after a short blip in prices, say, a seasonal change like the holidays.
But for day trading, buying and selling relies on short-term hold, which usually happens just within the day, in some occasions, within hours. Prices may go up by just around $0.01, but with 10,000 or 100,000 bottles a person may earn $100 or $1,000 in just a short term.
Some are not satisfied with such gains that they choose to hold on to their shares for a longer time, to look for bigger increases in stock price. Some do a mix of day trading and long-term investing.
There are things to consider in choosing which trading method to prefer. Both require traders to be focused on market changes, although on different levels.
Since day traders rely on daily movements within the stock market, they have to monitor it daily to get the best scenarios.
Long-term investors meanwhile should be alert for trade triggers and surges in price of their investments, as many see this as a good opportunity to sell shares. Both also have disadvantages: for example, with day trading, money investing may not translate to high profit returns, as you trade on a daily basis.
But for long-term holds, you may encounter problems if a company does not grow as expected, or worse, when stock prices are lower than what you bought them for — instead of being able to make money in stocks, you may actually lose more money.
Best methods to earn money
• Open a brokerage account
So how do you start investing in the market? First step is to open a brokerage account — a financial account within an investment firm that gives you access to shares and bonds. There are several brokerage firms in the United States, with some not even requiring a minimum amount of money before opening an account.
• Set aside a specific amount of money
However, experts suggest that the best way for people to invest is by setting aside a specific amount of money first — preferably around $200 to $1,000 — before opening a brokerage account. It is also wise because firms not requiring any minimum amount would only allow you to start investing after you have transferred funds in the account.
Opening accounts are quicker nowadays, as several brokerage firms offer these online – which comes in handy amid the COVID-19 pandemic.
Oftentimes, brokerage firms also act as the stock broker, or the middleman between those who want to purchase shares and those who sell them. Some of the firms seek a commission for doing the investing work for you, while others claim to have zero interest.
Brokers also operate online, which means that you can monitor stock trends from the comfort of your homes.
Prices are set when the bid and the ask or offer meet: the bid is the price preferred by someone buying shares, while the ask is the price which a shareholder wishes to sell the stocks.
You can start putting money in thousands of publicly-listed companies coming from different industries like energy, telecommunications, automotive, real estate, banking and finance, and food and beverage.
As there are thousands of transactions in just hours — in accordance to the law of supply and demand — these create small changes in stock prices, which affects those engaged in day trading as these quick surges dictate when they should buy or sell.
Where to invest?
But where is it ideal to invest? Experts believe that the best choice is to invest in corporations inside the market index, or the S&P 500 which is a list of the top 500 companies in the United States. But some of the prices within this index, which includes well-known manufacturing, real estate, health care, and industrial companies across the US may be high.
Others try to buy shares from a company with low-priced stocks, granted that it has a history of bouncing back from adversity — to provide some assurance that it is worth taking a risk for.
Risks in investing and how to avoid them
Speaking of which, risk is an important aspect of stock trading that people should consider. Best business minds believe you can make money in stocks: the trick is that you just have to manage risks properly.
Here are some of the common risks and possible mistakes that beginners should avoid:
• Not analyzing market movements
Risks exist because stock trade relies on analyzing and predicting the market flow, which is not easy and foolproof. But even if predicting movements and monitoring variables affecting stock prices are difficult, you still have to do thorough analyses.
Even if publicly-listed companies are required to publish their accounts and finances for transparency, ordinary investors, especially those without voting rights in the corporation may have a narrow idea of how the company is being run.
Documents do not put into consideration several intangibles, from the attitude of people running the business, and how they handle money. Are the executives making money within accepted limits? These are things that investors must be aware of, whether through the news or advice from others.
• Investing in questionable companies
As the digital age puts some companies a scandal away from collapse, it is doubly hard to ascertain when stock prices will be affected — and whether you can make money or at least retrieve initial investments. But keeping a nose for news may help you on your ventures.
Take the case of Japanese car manufacturer Nissan as an example: when news of a scandal involving former CEO and President Carlos Ghosn broke out, prices of Nissan’s stock plummeted.
Ghosn, accused of financial misconduct and making money beyond his salary, claimed that he is only being framed, and that he escaped Japan because he stands no chance of winning a trial there.
But no amount of changes within the management can make Nissan’s stocks go up. In fact, after the scandal, many investors pulled their shares out. In a story last February 2019 at Forbes.com, Nissan Motor Co.’s stocks on trade at Nasdaq were expected to continuously go down because of the issues.
Currently, Nissan’s shares are priced at around $7.72 per dollar, better than the $5.81 last March 29 but still way below the $21.77 in January 2018, months before the Ghosn scandal broke out. This means those who pulled earlier would have lost less than those who sold their shares later on.
• Being excessively conservative
Nissan’s low stock prices may be bad news, but some believe that now is the right time to buy Nissan’s shares as they are confident that the brand — known for its cult following due to legendary cars in the 1990’s — can turn the situation around.
In the market, there is a belief that the best time to invest and put money in the stock is during a crisis. As explained earlier, the best scenario for traders is to “buy low, sell high”, and crises usually drive prices downwards.
This is also best exemplified by people who invest despite the pandemic. Initially, people were worried about a possible stock market crash, as a lot of the world’s workers were confined to their houses. This also raised fears of fast stocks or a fast market, where cataclysmic events forced quick movements — usually to withdraw investments.
But months after the COVID-19 spread throughout the globe, analysts believe that the health crisis would have a direct yet limited impact on the market.
Going back to Nissan, there are pessimists who believe that Nissan may not fully recover, as they have been encountering financial difficulties even before the Ghosn issue. Couple that with the pandemic, and they think Nissan may actually close out – but who knows?
• Investing without safeguards
Another problem among new investors is looking at the market as a way to escape obligations, as if you can surely earn money. Most of the world’s best traders do not put everything on the line — they invest in stocks only when they have extra money, keeping their personal finances separate from those they use for investing.
Some even start re-investing only when dividends from the long-term investments are handed, or if they gain money by selling shares at a high price. In that manner, you would not need to shell extra funds just to support investments.
More importantly, personal finances should be in order first before starting market investments, because this should not be seen as a way to bail out of debt.
• Overly-aggressive mindset due to losses
A lot of conservative investors are easily disappointed when prices of their shares decrease. And because they worry that decline trend might continue, they sell their shares to manage risks — at a price lower than they initially purchased.
Once they get their money back, they become overly-aggressive in buying new stocks, often from a corporation performing better but with more expensive stock prices. This leads to spending more — because you’re selling previous stocks cheaply, and purchasing new but more pricey ones.
Exercise patience. Remember that stock prices may fluctuate, but it is not a permanent trend.
So with all the risks, is investing in the stock market worth it? If the goal is making money, can you actually do it?
Well, if you have the discipline – as reaping the effects of stock trading comes with an immense amount of discipline – then by all means open your first brokerage account now!