Prior to diving into the world of trading stocks, the whole concept may seem a bit confusing. As more stock trading apps like Robinhood and TD Ameritrade hit the market, more people are interested in learning the ropes. Get to know the basics of trading stocks in this guide.
The Stock Market Explained
The stock market is where you can buy and sell stocks. It consists of different exchanges, such as the New York Stock Exchange and NASDAQ. Before truly understanding the stock market, you need to know that stocks are a kind of investment that is a share of ownership in a company. The purpose of buying and selling stocks is to see if a stock’s value will increase. For instance, if you buy a stock for $1 and it rises to $5 the next day, you could sell it for a $4 profit.
Unlike your average store, you can only purchase stocks through a licensed brokerage. This is a firm that makes trades on your behalf for a set commission or fee. When looking for a broker, research to find one who provides excellent customer care, like one-on-one meetings or stock research.
Types of Stocks
The types of stocks you invest in will influence the way you trade. Not every stock is the same, and some have more risks. Get to know the most common types of stock:
- Common stocks: You own a share of the company’s profits and get the right to vote on important company decisions. Common stocks come with dividends, which are regular payments to stock owners.
- Preferred stocks: Investors with this type of stock are paid a fixed dividend. You receive your dividend payments before a common stock owner would in a situation like a liquidation or bankruptcy.
- Penny stocks: These are small companies’ stocks that trade for less than $5 per share. You may trade them on the New York Stock Exchange and NASDAQ, however, you are more likely to find them through over-the-counter (OTC) transactions.
- OTC stocks: These are stocks you trade on one of the three tiers of the OTC market. They tend to be shares of small companies that can’t qualify to go public on national securities exchanges.
Why You Should Diversify Your Portfolio
When you diversify your portfolio, you’re investing in a variety of assets. The purpose of doing this is to spread your luck and maximize profits. Investors choose multiple assets to invest in, such as stocks, bonds, and mutual funds, in order to balance their risk. For example, if you lose money on one of your stocks, you may earn money on another. Of course, the goal is to earn money on all of your investments.
Having a diversified portfolio gives you the chance to invest in high-risk assets that could pay out big. Having a mix of risk levels helps you ensure that you never lose it all. When diversifying your assets, make sure you’re aware of each one’s risk level.
The world of stock trading gets more complex as you go. As a beginner, get started by making low-stakes trades. Over time, you learn how to assess your risk and can make an impressive profit.