How to Invest in Common Stocks in the Stock Market
The Stock Market
Investing in the stock market is a risky business. However, there are many areas in which one can invest in and either reduce or increase one risk. Usually, the higher the risk, the higher the reward. The areas of investments are options, mutual funds, common stocks, preferred stocks, governments bonds, etc. Government bonds and mutual funds are the list risky. However, the returns on these investment instruments are very low. Returns usually range from about 3% to 5%. The area in which I am specialized in is common stock and the focus of this article is about investing in common stock. Investing in common stock has a higher risk than government bonds and mutual funds. However, if you do your homework properly and thoroughly you will reduce the risk significantly and the rewards are usually great.
Getting Prepared to Invest in the Stock Market
Before you can invest in the stock market, you will need to open an account with a reputable stock brokerage company. It is preferable to use a bank that has a brokerage division. The reason for this is for you to have easy access to your money. That means, you can transfer money from your brokerage account to your bank account instantly. Otherwise, money has to be mailed to you when you do a withdrawal from your brokerage account.
Next, you need to sign up to have online access to your account. After this is done, you will need to have real time access to the stock market. Most reputable brokerage companies will provide this service to you depends on your deposit. The more money you deposit, the more services you will get for free. Note - you do not need the 15 minutes delay real time stock prices. This is no good to you. You need real time stock prices. Once this is set-up, you are ready to rock and roll.
Common Stock Selection
The Next thing you need to do is to find the stocks that you want to invest in. This part is time consuming. What I did for finding my stocks is as follow: at the end of every business day, I looked at the stock market of interest and look at all the best performing stocks for the day. In doing so, you will get a stock code which is necessary for buying, selling, and researching stocks, etc.
The next thing you want to do is to research each stock that you are interested in. You want to look at financial statements and balance sheet for 5 years. Financial statements will tell you if the company is making money or losing money. Also, a financial statement shows you a company sales trend and expense trend. Therefore, you can determine if a company is growing or not. The balance sheet will tell you if the company has money and assets or if it is in debt. If a company's liabilities is 25% of all its asset, that is a financial sound company. However, if a company's liabilities is 75% of its assets, that company is in serious financial debt and will be a very risky investment. To be successful in the stock market, you will need to be knowledgeable about financial statements and balance sheets.
Next, you want to research what a company do as a business. Also, you want to know who are the stock's holders of a company, who is the CEO(chief executive officer), who is on the board of directors, does the company pays dividend, etc. Also, you want to check all the news headlines about a company for about 5 years. After all this is done and you are satisfied with the company, you put this company in your portfolio. You do the same procedure for each company that you are interested in. Note - you have to diversify your portfolio. Invest in companies that are in different kind of businesses. For example, invest in companies that are in various business segments - mining, manufacturing, services, etc. Once you have a number of companies in your portfolio, you are ready to do business.
Monitor Stock Price
The trick of making money in the stock market is to buy low and sell high. Therefore, timing is very important in the stock market. All stocks have a pattern. There are peaks and valleys in every stock. Certain news, will drive stocks prices down or up. These are the waves that you have to look for. Therefore, you buy on the low and sell on the high. To monitor a stock price, you will have to create a stock chart. Your brokerage company may provide this service. look for stock chart. You may also find stocks charts on Yahoo Finance.com, StockCharts.com, and other similar websites. Once you find the service, all you have to do is to enter the stock code. Next, you will have to select a time frame. You can select the maximum time frame and see what the stock have been doing for a number of years. Next you can select 5 years and see what the stock have been doing for the last 5 years. You can play around with the stock chart to get a feel of the stock. At the end, you want to figure out the stock low and high price. Being able to analyze a stock chart is a very important aspect of investing in the stock market. Acquiring this skill and becoming very good at it is very important for making money in the stock market.
Buying and Selling Stocks
Once you have done all your research, and you are satisfied that you are in a good position to buy, you go ahead and buy.That means that you go online and put in a bid to buy a certain amount of stocks at a certain price. Once your bid goes through, you are now a part owner of a company. All the information about your purchase will be available to you online. Note - the brokerage company will charge you a commission for buying and selling stocks for you. Also, the key to making money in the stock market is to buy stocks in large volume. You do not have to buy all the stocks on one purchase. You can buy in segments. That means, if you want to buy 2000 shares, you can purchase 500 shares on 4 different occasions - buying leverage.
Now you have bought some stocks, you have to keep on monitoring the stock price. Sometimes, the stock price may drop further from where you purchase. Do not panic, as long as you bought in the low range, you will be good. It is very difficult to buy at the exact lowest price and sell at the exact highest price because you will never know for sure what that will be. Stocks have a tendency to hit new lows and new highs. You will have to trust your instincts based on whatever is going on in the news.
The good thing about common stocks is that you can sell them at anytime as long as the price is right to you. So therefore, if your stock hit it lows and it highs on the same day. You can purchase and sell the stock on the same day. I have done that on numerous occasions as a Day Trader. However, this does not happen all the time. Sometimes, you may have to hold the stock for a while before you suic stock can sell. The key to the stock market is that you have to monitor the business news all the time. Certain news, will cause the stock prices to either drop or rise and you have to be ready to act. Now, you have the basic knowledge to start investing in the stock market.
Stocks can lose all their value in the market, and this has happened before, especially in bankruptcy. Even if the company goes bankrupt, the reality is that shareholders often get some residual payment back, but usually it's just pennies on the dollar. This fact should not deter you from investing in stocks, or investing in general. However, we would be lying if we said that stocks carry no risk (although some, of course, carry more than others).
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