Basics of the stock market

The stock market can be a confusing place for newcomers. Financial news is often full of confusing slogans and rumors; Rumors about floor trading in treasury shares, par value and retained earnings often mean nothing to the average investor. But for those looking to trade stocks, understanding and using such concepts is a key tool for navigating this asset class (stocks).

While investing in stocks will involve capital risk, it can be an effective way to build wealth, and choosing an appropriate and balanced stock portfolio can lead to a fixed passive income. The following is a guide for beginners to stock trading, and we will help you turn the incomprehensible terms of the stock market into practical knowledge.

Getting started in stock trading; The main points discussed:

• What is the stock market and how are stock transactions carried out?
• How can an investor potentially make money trading stocks?
• What is required to start trading stocks?
• How do you choose the right stocks to trade?
• Things to consider before trading stocks

What is the stock market and how are stock transactions carried out?

Becoming a confident stock trader or investor requires understanding the ins and outs of market fundamentals and how stock trading works.

What is the stock market?

The stock market  is a place where securities are bought and sold by real and legal investors. In modern times, this process is done electronically through major stock indices such as the Nasdaq 100, the FTSE 100 and the DAX, each of which represents the collective performance of the stocks of the companies included in that index.

These stocks are tracked by the market index to obtain a value for the index based on the market value weighting method of each company. This means that a large movement in the price of a large stock can affect any of the indices mentioned.

What is a stock?

Shares  are actually a certificate of ownership of a certain company. Shares are issued by a company to raise capital for business growth, and their price fluctuates depending on the company’s performance. Shares can be listed on a stock exchange (government) or only available to private investors (OTC or over-the-counter). Commonly traded stocks include Boeing, Xerox, and Apple, whose shares are traded in the Nasdaq 100, Dow Jones, and S&P 500 indices.

Events such as product launches, new CEO appointments, and earnings announcements are all things that can move stock prices and influence stock selection. Most of these factors are discussed in the “How to choose the right stocks” section.

On the other hand, securities refer to proportional ownership of shares in a particular company. For example, owning 50,000 shares of a company with 1 million shares outstanding gives the investor 5% ownership of the company.

How are stocks traded?

When you start investing in the stock market, it is important   to make an important distinction between trading  and  investing .

trading

A trader can make money (or lose money) by speculating on stocks in a  short period of time , depending on the potential of the trades. Often, traders focus on technical patterns using methods such as scalping or day trading, and often use short-term time frames such as ten-minute charts.

Using online trading platforms, traders can monitor stock performance along with entry and exit prices.

investment

An  investor can usually make a profit in his transactions by buying assets through a brokerage account and keeping them for a longer period of time  , according to the potential  . During this period, he may seek to receive stock dividends, as well as benefit from long-term value appreciation, eventually selling his stock at a peak price.

This “buy and hold” strategy may involve holding the stock for at least five years. Focusing on “total return” means that interest, dividends, and capital gains (gains from the sale of equity securities) are taken into account when calculating the total return for a given stock.

How to start trading in the stock market?

The easiest way to start trading or investing in the stock market is through an online trading platform or brokerage account, which can be set up simply by verifying identification documents and providing initial capital. Finding a broker that charges lower commissions is important for active traders, as they will naturally pay higher commissions than those who trade less volume.

Investors also need to decide whether they are looking for an individual stock or investing in mutual funds. Individual stocks, as mentioned above, represent shares of a particular company, while mutual funds cover a wide range of stocks and seek to outperform the market with their funds under management, and exchange-traded funds Or ETFs track an index.

Getting Started in Stock Trading: A Checklist

• Set trading goals
• Choose the right broker
• Research key companies
• Keep your portfolio diversified
• Practice risk management

How to choose the right stocks for trading?

When it comes to picking the “right” stock, it may be worth it for market participants to go for companies they are already familiar with. It can also be useful to consider the factors that contribute to the possibility of its price increase. These factors include:

1. Financial health of the company:  How is the balance sheet of the company? Has the income and profit increased in recent years? How much debt does he have? Does it have the right motivation for productivity?
2. Level of innovation:  What new products or development programs are being developed? How does it stack up against competitors in terms of customer satisfaction principles? Is it flexible to turn around and face new market demands?
3. Dividends: If a company pays dividends, does it increase them? How often are dividends paid?
4. Price and Valuation:  Is it trading below value? To get a better picture of this, you can get the price-to-earnings ratio or P/E by dividing the company’s current stock price by the earnings per share. Usually, P/E is considered “cheap” if it is 15. (In Iran, the valuation criteria are different. Currently, the appropriate P/E for Iranian stock is less than 10.) However, it may be cheap due to slower growth. be In fact, it is worth identifying “cheap” stocks that may be positive in most of the above areas. Determining the “market” value of a company may be achieved by calculating the total assets on the balance sheet, minus depreciation and liabilities.
5. Liquidity:  Liquidity refers to stocks that have sufficient trading volume to allow traders to enter and exit positions without difficulty. Examples of liquid stocks include ExxonMobil, General Electric and Alibaba. To know about the liquidity of the stock market, pay attention to the average volume of transactions and the value of transactions.
6. Volatility or Volatility:  Volatility refers to stocks that have the highest potential for significant, rapid, sudden, and high price movements. Picking volatile stocks can be risky but also provide real opportunities.

Another thing to consider is how to choose the right stocks in a stock portfolio. For example, a strategy may be to invest only in growth stocks to receive large capital gains, or to invest in dividend stocks and defensive stocks for greater certainty. stocks).

4  things to consider before trading stocks

Before starting to work in the stock market, traders and investors should have an idea of ​​their goals, the amount of money they want to risk, an understanding of their trading style and how to diversify their stock portfolio.

1. What are the goals?

How long is the cash expected to remain in the stock? How is the planning related to this money? Is there another opportunity to need the invested money before the investment pays off? For example, if someone is saving for retirement, investing in stocks may be a good option because it is a long-term plan. But if that person wants to put down a deposit to buy a house next year, they might want to short-term trade stocks or consider another asset instead.

2. How much money is at risk?

Market participants must consider how much money is available for trading or investing. A prudent amount for capital might be 5% of annual income, but it’s different for everyone. When it comes to risk, the more knowledge one gains of industries and the companies within them, the better prepared one is for the inevitable market fluctuations.

3. Controlling emotions

Managing emotions is extremely important when trading. When trading stocks, there will be a lot of market information – most of it useless – in the way of an investment. A trader or investor must be able to filter out rumours, speculation and noise and not let the fear of missing out (FOMO) influence stock trading decisions. It is important to manage emotions and stay true to the original reasons for stock selection. Also, there will naturally be stocks that don’t perform as expected. The ability to cope with loss is a key principle.

4. Is the stock portfolio diversified?

A diversified portfolio may mean owning/trading stocks in different companies, and across multiple sectors, to protect against the inevitable. Other assets that may be considered include bonds, forex and commodities.

Common questions of the stock market

Why is the stock market important?

The stock market is important for businesses, individuals and the economy. This market allows businesses to raise capital for their growth and distribute their risk. The stock market allows investors to potentially earn a return on their capital and increase their wealth, and allows the economy to benefit from an infusion of domestic and international cash.

The stock market is also a measure of the performance of the economy. Its trends can help people understand business cycles and how they work and predict future policies. The performance of the stock market is also related to the performance of pension funds and other assets.

For more information, read the upcoming tutorials published on the site.

What is the difference between a stock trader and an investor?

A stock trader seeks to speculate on an asset in the short term, which may even be as short as a few minutes, while an investor with a higher objective designs a “buy and hold” strategy that holds the stock’s value over several years. It evaluates and also earns dividends.

Why choose stocks over bonds?

While stocks represent a condition of ownership of a company, bonds are a type of loan issued by a company or government that pays interest on debt to investors. Bonds are less risky than stocks. However, naturally, they are also less efficient.

What are the main types of stocks?

The three main types of stocks are growth stocks, dividend-paying or yield stocks, and defensive stocks, each of which has different characteristics.

Growth stocks  are stocks that are bought solely for the purpose of capital growth. Instead of paying dividends, companies reinvest their earnings, which means the only way for investors to earn a profit is through capital gains (stock price appreciation). This makes growth stocks inherently risky. However, although capital may suffer losses, returns on stocks that are expected to grow quickly can make the risk worthwhile; Because in contrast to more risk, there is an expectation of more return.

Dividend-paying stocks (in Iran this type of stocks   are called DPS shares) , or  yield stocks , pay dividends to the company’s shareholders regularly (usually quarterly, but annually in Iran). This means that if a company pays an annual dividend of 10 cents per share, then it will pay a quarterly dividend of 2.5 cents per share.

Viper  stocks are companies that have reliable, high demand for their products and services regardless of the state of the economy. Industries such as healthcare, consumer staples, and utilities. This makes them ideal for analysis during economic downturns but may not be the best choice for bull markets.

What are the best stocks for beginners?

That being said, the best stocks for beginners are companies they know and understand, so it’s wise to consider stocks they’re already familiar with. Some of the most popular stocks by volume include Facebook, Google’s parent company Alphabet, Amazon, and Nike, all of which have triple-digit percentage returns over a five-year period.

However, for traders who are interested in the short term, a liquid stock is important, meaning that there is sufficient volume of buyers and sellers to ensure that a position is entered or exited at the expected price and avoids a price drop.

How many shares should a beginner buy?

How many shares a beginner should buy is a common question, but it’s better to focus on the total value of the stock rather than the number of shares. Usually, the capital is divided between the shares of different companies to create a diversified portfolio.