Investing is a hot topic in todays money driven society.
Everyone is looking for that edge to grow their money overtime. And I’m not going to lie, it sounds nice.
Most people keep their money in their checking and/or savings account thinking it will accumulate interest. But in reality it will be at a slower rate than inflation resulting in an actual loss of your money over time.
This is the same for many mutual funds and investment packages. They may have high interest, but after taxes and fees – inflation still wins out.
This leads many people to the stock market. And in reality, investing in the stock market is a smarter investment.
(BTW investing in knowledge (books, courses, programs) and yourself is the absolute greatest investment you could make, but that’s a topic for another article.)
But stocks are complicated. And scary if you don’t know what you’re doing. So we created this quick overview of what you need to know to get started in stock market investing.
And remember, there is not one single stock market strategy that works. A stock market strategy is essentially an application of theory and will not be fool proof; however, with several basic strategies/tips you can see healthy returns and mitigate (or minimize) risks and essentially losses.
And that’s what you’ll find below.
As a shareholder, or a stock holder, of a company, you are essentially an owner in the company. Stocks are also known as shares or equities.
The two main types of stock are common and preferred.
– Common stock entitles the owner to vote at shareholders’ meetings and to receive dividends.
– Preferred stock has a higher claim on assets and earnings than the common shares, but generally doesn’t have voting rights.
For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
It is important to have a diversified portfolio; meaning, the different stocks you invest in should be within different sectors, in various company sizes, and with different types of growth patterns.
Among investors, company sizes are usually referred to as large cap vs. small cap.
As far as investing in different sectors and industries, you don’t want to keep all your eggs in the same basket.
Road examples of different sectors include financial, technology, real estate, consumer goods, utilities, etc.
These broad sectors, when they are broken down into smaller subsets categorized by their specific business activity are known as industries.
An ETF, exchange traded fund, is a typically safe way to diversify your portfolio into a commodity, an index, a geographic location or a basket of assets within a similar sector or industry.
By owning an ETF, you get the diversification of an index fund but it trades like a stock on an exchange.
Stock Categorizing Terminology
Different stock categorizing terminology used by investors includes blue chip, dividend, and speculative-growth stocks. Below, we discuss each of these important terminology since they represent the fundamental building block of any investment portfolio.
Blue Chip Stocks
Companies that are considered blue chip stocks include Microsoft, Exxon, and General Electric.
It is important to have at least 1 or 2 blue chip stocks as the backbone of your portfolio. A blue chip stock is a company that has been in business for numerous years, one of the leaders in its sector, its market capitalization in the billions, is financially stable, and in a respectable market index.
I.E. the Dow Jones Industrial Average or the FTSE in the UK.
Blue chip stocks are seen as a safe investment that can whether macro events, different market cycles, and industry trends and challenges
Not always the case as we have seen during the Lehman Brothers and General Motors bankruptcy in 2008.
These stocks tend to be longer term investments, holding them for 1+ years and not paying attention to shorter term noise, i.e. earnings reports, small changes in industry, short term stock moves, and negative PR or unfavorable news articles.
The 30 largest companies within the S&P 500 and Nasdaq, blue chip stocks, are compromised in the Dow Jones Industrial Average aka the Dow or DJIA.
This is a good video to show you how to scan the market referencing the Dow (What Is The Dow?).
Quarterly dividends are typically given out by blue chip stocks, which is another incentive to invest in blue chip stocks.
Dividends are distributions of the company’s earnings and/or free cash flow to investors who have equity in the firm.
Dividends can be quoted in terms of dollar amounts or in terms of a percentage of the current market price for the stock, also known as the dividend yield.
As an investor, you have the choice to receive the dividend in the form of a cash payout or you can automatically reinvest the dividends into more equity in the company.
With interest rates at such a low rate, some companies return a larger dividend percentage to investors annually than the average yield price for bonds.
Companies that give investors a large dividend tend to be less volatile with stock prices not moving in either direction too much.
A speculative stock, also known as a growth stock, is a high risk, high reward stock for your portfolio, which typically should amount to 10% or less of your total stock portfolio.
These stocks tend to have high beta, which means it tends to be more volatile compared to the market as a whole..
Investing in a speculative-growth stock tends to be a shorter term trade in which as the investor, you try to ride a new trend, a revolutionary idea or technology, exploit a commodity news, or a game changing/revolutionary idea.
When trading a speculative stock, your entry and exit point are imperative, as well as profit taking strategies in order to let your profits run while mitigating risk.
To help minimize your losses, you should always have a stop order (stop limit or stop loss) which will help you hedge against an aggressive sell off.
It is important to set specific prices that you will either trim a position, fully exit the position, and how low you will keep a stock if it happens to fall below your purchase price. Many investors believe your exit point is more important than your entry point when investing in a stock. On a final and important note, always remember when you make an investment, it’s important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money.
This article is a brief overview of investing in the stock market. I purposely didn’t want to get into too much detail because this is meant to be a short read. Feel free to contact me if you want clarification or a further explanation on any point(s) I brought up within the article.
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Do you invest in the stock market? What’s your strategy? Let us know in the comment section below.