Stocks and Investing
When beginning to investigate the world of stock and investing, one of the most important things to understand is the basics. Discerning the differences between stocks, bonds and mutual funds, allowing a thorough understanding of the stock market, leading an investor to make the right decisions in times of turbulence, and understanding the terminology of the investment world are all essential points to consider before investing.
What are Stocks?
Stocks, or equities, are a type of financial security that gives investors ownership in a company. When you purchase stock, you are looking for the company to do well and make a profit. All shareholders are part owners of the company and each share of stock you purchase gives you the right to vote for board members, receive dividends, and collect the proceeds should the company be sold.
What are Bonds?
Bonds are another type of security, similar to stocks, and can be bought from a financial institution. When you buy a bond, what you are essentially doing is lending money to the issuer and agreeing to receive payments in exchange until the bond matures, at which point the principal is paid back. Bondholders are paid back first in the event of bankruptcy and therefore provide a lower-risk way to get involved in the stock market.
What are Mutual Funds?
Mutual Funds are a type of investment vehicle where a group of investors pool together their money, and the funds are then invested in a variety of stocks, bonds, and short-term debt in order to diversify their investments. By pooling their resources, mutual funds can achieve a greater potential return.
Understanding the Stock Market
In order to become comfortable with the stock market, it is important to understand what it is and how it works. The stock market is essentially the buying and selling of companies, and investors make money by buying low and selling high as the stock price fluctuates. Investors are able to monitor stock prices through trading platforms and when they find that they purchased something too low, they can make a quick return by selling the stock before the stock prices rise.
Different Types of Stock Market Analysis Technical Analysis
Technical analysis is a popular technique for forecasting stock prices. This type of analysis examines various stock market indicators such as open, close and the highest and lowest prices of the day. Technical analysts use charts and other graphical representations to identify price trends and look for patterns, shapes and movements in the stock market. Further, they might use software or trading platforms to seek out chart patterns and predict a certain stock’s future price.
Fundamental Analysis
On the other hand, fundamental analysis goes beyond a stock’s price information. It examines a stock’s fundamentals by taking into account the company’s news or events, whether good or bad. Fundamental analysis focuses on analyzing a company’s financial statements and their ability to generate profits. Analysts may investigate a company’s balance sheet, income statement, cash flow statement and more to understand their financial health before investing.
Investment Strategies
Buy and Hold Strategy
The buy and hold strategy is a long-term investment strategy that involves purchasing stocks and holding onto them indefinitely. This type of approach assumes that the market will eventually rise in the long run, particularly if you are purchasing stock in strong companies. This strategy is especially beneficial if you do not have the time or interest in actively managing your investments.
Dollar-Cost Averaging
Another way to invest is through the dollar-cost averaging method. This type of strategy is about consistently investing the same sum at regular intervals for a certain period of time. This method is often used to invest in volatile markets, such as those that occur with stocks. The idea behind it is that over time, the stock prices will fluctuate, but the steady investment will help to balance out the volatility.
Day Trading
Finally, if you are an investor looking to make more active investments, day trading might be the right approach. Day trading involves buying and selling a stock in a matter of hours or even minutes, capitalizing on short-term price movements in order to make a profit. This method requires a greater level of risk, as well as more focus, discipline and research on the part of the investor.
Investment Terminology
When getting involved with stocks and investing, it is important to understand the terminology surrounding the industry. Here are some key terms to be familiar with:
• Dividend: A dividend is a payment from a company to shareholders.
• Earnings per Share (EPS): The amount of money a company makes in a period of time, divided by the amount of shares that are outstanding.
• Return on Investment (ROI): Sometimes referred to as the return on equity (ROE) or the return on assets (ROA), this is a measure used to evaluate how well a company has used its resources and the financial returns they have made on them.
• Market Capitalization: The value of the company determined by multiplying the outstanding shares by the current market price of the stock.
• Volatility: A measure of how much the stock price can move up and down over time.
• Margin Account: An account that allows an investor to borrow funds from a broker in order to purchase an investment.
• Bull/Bear Market: A bull market is when the trend is up and investors feel very optimistic, while a bear market is downward, and investors are pessimistic.
Investing in stocks can be an intimidating endeavor and understanding the basics is key before embarking on the stock market journey. This overview provides an excellent starting point to become comfortable with stocks and the industry at large. Becoming familiar with different stock market analysis techniques, investment strategies, and the important terminology will help lay the foundation for a successful venture.
