3 Stock Market Basics for Profitable and Safe Investing
When you’re just starting out, investing in stocks can feel intimidating. After all, there are dozens of questions you need to answer before you even get to stock market basics like setting up a brokerage account, researching companies and building your portfolio.
For example, what’s your risk tolerance? For a younger investor, taking larger risks in the stock market won’t matter as much because he or she has years before retirement. However, for an investor nearing retirement, high-risk investing is likely not the best course of action.
That’s to say nothing of the dozens of other questions that need to be addressed, such as whether you should go with a full-service or discount broker, or what role other investments, like bonds, mutual funds or ETFs, should play in your financial plan.
These 3 Stock Market Basics Make Investing Easier
Here are three stock market basics that will help put you on the road to buying and selling shares with confidence. I should also point out that we’ve released an in-depth free report that goes into each of these topics—and many more—in great detail. It’s called “Understanding the Stock Market.” You can get your copy by clicking here.
- Stock Market Basics Tip #1: Full-service brokers offer help at a steep cost. If you do your own research, it makes sense to go with a discount broker. That’s because they let you buy and sell stocks online for as little as $10, and their fees can be as low as one-twentieth the amount that full-service brokers charge.
Full-service firms offer personal advice and a wider range of services, as well as investment products and often access to the company’s own research. However, all of this comes at a hefty price, with commissions of around $150.
Something else to keep in mind: if you go with a discount broker and you’re not comfortable making trades over the Internet, be prepared to pay higher commissions. Some discount brokers charge up to five times more for a phone order.
- Stock Market Basics Tip #2: Know the difference between growth and income stocks. All companies go through a lifecycle. They may start out as growth stocks but later change to income stocks. Such firms are usually mature and generate more cash than they can use profitably to expand. Consequently, they pay shareholders this excess cash in the form of dividends. Older, retired investors will often invest in income stocks to pay their monthly expenses.
Growth stocks are companies with faster earnings growth, usually 15% or more a year. However, they are volatile. If investor interest in these companies falls off, they can drop quickly. These companies generally operate in more volatile sectors, such as technology or oil and gas exploration. They are generally focused on growing their earnings, so any money they bring in is reinvested back into the business. Dividends are unlikely.
- Stock Market Basics Tip #3: Resist the urge to trade too frequently. Once you’ve zeroed in on a few companies that you believe have significantly higher value than their current stock prices, a sound strategy is to buy and hold.
This lets you generally overlook the daily ups and downs in the market and pay more attention to the company’s long-term performance. And barring major catastrophes, you’ll watch the value of your investment increase in the long run.
Short-term traders, by contrast, aim for quick profits. They buy stocks that they expect to gain over a short period and then sell out before they drop. However, consistently predicting short-term price movements is very difficult. You also have to spend a lot of time paying close attention to the stock market in general, and in particular the price of your exit points and stop losses (or orders to sell a stock when it reaches a specific price).
Another benefit of a buy-and-hold-strategy? By trading less frequently, you’ll save on brokerage commissions (see point No. 1 above).
For more on these and numerous other investment basics, such as the ins and outs of bonds, mutual funds, ETFs and much more, check out our recent report, “Understanding the Stock Market.” Download your free copy here.