This is the first of a multi-part series entitled Investing for Beginners. Over the next several parts of this series I’ll be covering basic skills needed for investing such as Accounting, Economics and Stock Market Basics. Today I’ll begin with Stock Market Basics.
An accounting professor of mine once told me that if anyone wants to be successful with investing they can be. Stock Market Basics truly are not a difficult thing to learn. At its core the Stock Market is essentially a free market system, meaning that it’s based on forces pulling against each other; these forces are supply and demand. As a beginning investor it’s important to remember that these pulling forces are based on several things, such as a companies fundamentals (revenue, profit, assets, liabilities), technical evaluation and even “acts of god.” To be able to interpret these market forces and company profiles requires some knowledge in accounting and economics and also a desire to keep up on stock market and company news. Thus Stock Market Basics can be learned by education, which is the foundation for success as an investor.
Investing for Beginners: What Is The Stock Market?
I’ll liken the stock market to an auction. If an auctioneer has 50 widgets for sale he or she is likely to start the bidding out at a price that’s much lower than if he or she had only 1 widget to sell. The more the auctioneer has to sell (supply) the less they are probably going to sell for because buyers (or demand in this case) are limited (based on price, supply, etc). The stock market is similar to this. However instead of buying a product or service the buyer actually buys ownership in a company.
The way that the market works is actually strikingly similar to an auction. Brokerage companies (companies through which you can purchase stock of other firms) often have representatives on the floor of all the major stock exchanges, such as the New York Stock Exchange (NYSE). These representatives could be thought of as auctioneers. They take orders from those who want to buy stock and they take orders from stockholders who want to sell their stock. They then match up orders and, voila! A stock trade has taken place.
So What Do I Do First?
In order to start trading stocks you’ll need to open an account with a brokerage firm such as Scottrade, Charles Schwab, Sharebuilder or Zecco. I personally recommend Zecco as they offer 10 free trades a month with a balance of $2,500 or more in your brokerage account. If you want to open an account at either Scottrade or Sharebuilder shoot me an e-mail. I think they offer incentives for referring friends – both to the referrer and the refereed. If you’re interested in Zecco (my personal recommendation) then you can follow the affiliate link below to sign up.
Next you’ll want to think of a company that you want to invest in. Ideally it should be something that you know a little bit about, or support as a company. Then you would do some research on them. For example (and we’ll use AAPL because it’s a favorite of mine) if I wanted to buy shares in Apple I would first do some research on the company to discover for myself if I think they will continue to be profitable in the future. A good (but very general) rule of thumb is that as long as a company continues to increase their earnings they will continue to grow and so will the value of their stock.
Prices Fluctuate, So Don’t Panic!
It’s important to remember that even though over the long-run (we’re talking years, not months) the value of a stock is based almost entirely on fundamentals, the share price of a stock is still subject to irrationality and bubbles. In other words if I were to buy 100 shares in AAPL today, expecting to hold it for 5 years before I sell it, I can expect that the share price will, over the days and the months, have its ups and its downs. I should be confident, however, that my decision to purchase an ownership (through 100 shares of stock) in Apple will pay off in the long-run.
Investing is not something that should be taken lightly. If a friend of yours gives you a tip that they think a certain stock is going to go way up, you probably shouldn’t listen to them. For example, I had a friend who recommended I pick up some SIRI (Sirius Satellite Radio) years ago when they first signed on Howard Stern. Back then the stock price was somewhere in the teens… today it’s a penny stock. His “hunch” wasn’t right, and your friends’ hunches probably won’t be right either. Don’t trust anyone except yourself, your gut and your wallet when it comes to investing. This way if you make a stupid investment (and we all do at some point) you’ll have no one to blame but yourself AND you’ll be able to learn from your mistake.