Investing your money in stocks is one way to achieve accelerated growth of your wealth. Many people discourage stock investing because it comes with a high degree of risk of losing money. However, as I see it, not investing at all is a bigger risk! What they don't tell you is, where there is a high degree of risk, there are high returns too. There are ways you can minimize the risk factor, or rather take calculated risks. It all depends on the intellectual framework that you follow while making choices.
Stock Market Basics In a Nutshell
To a novice, stock investing can be pretty much of a bewildering experience. The stock terms or jargon does not make things any easier. Let me explain the basics of investing in a stock market, in as simple terms as possible.
Introduction to Stocks
When you buy a stock, you buy a quantum of ownership in the company. That is the basic idea. To raise capital, a company gets listed on the stock market after it sells ownership in the form of millions of small shares. When you buy a stock, you become a shareholder of the company, who possesses a quantum of ownership in that company. The selling of shares of a company in the primary market is through 'Initial Public Offering (IPO)'. Once the shares and stocks are bought, they can be sold in the secondary market which is the stock exchange.
How to Make Profits Through Stock Investing
All that is okay, but how does one make profits? It is simply by buying a share at a lower price, holding it till its price rises in the secondary market, and then selling it. 'Buy Cheap and Sell as Dearly as Possible' - that is how profit is made in the stock market. So, the basic idea of stock investing is just this. You pick out stocks with potential to grow, you buy them and sell them when you think their price has peaked enough. That is all that is there to it.
However, picking the winners is not so simple and it needs thorough research. To make profits in the stock market, all you need is substantial capital to buy stocks, ability to pick out the winners and then sell them when the timing is just 'ripe'. Another way of making money through stocks is through buying shares that pay dividends, which are slices of profit provided by the company to the shareholders periodically.
How to Trade Stocks
To buy a stock, you need to open a stock trading account with an exchange like the New York Stock Exchange. You could either buy or sell stocks on your own, or let a stock broker do it for you. If you want to learn, trading on your own is the best option. However, it requires a lot of study and daily research. One of the prime market basics is learning how the prices of stocks rise and fall.
Individual Stocks or Mutual Funds
Instead of buying individual stocks, you could indirectly invest through 'Mutual Funds'. Mutual funds buy stocks and other types of securities, by pooling in money from small investors and creating a fund. The profits are shared among the investors. Investing in mutual funds is a sort of 'surrogate investing'. Where the fund managers do the choosing, buying and selling of stocks for you, and you get a dividend of the profits.
Stock Research
Stock investing boils down to making, buying and selling choices at every moment. To choose the best stocks to invest, you must research the company background, performance and potential. It involves studying company balance sheets and other parameters that gauge the health of a company like debt to income ratio, liquidity, earnings, price/earnings (PE) ratio and future potential.
You could opt for value investing or speculation investing strategy. The first is a solid logical framework while the other methods rely on everything from voodoo to software forecasting programs. Stock market investment advice flows from all quarters on the Internet. It can be very confusing for beginners. One of the best investing tips, that I have ever got, is 'Do not invest in what you do not understand'. Invest in business sectors whose working and potential is understood by you. Just knowing the basics is not enough. You need to gain practical experience.
Spend time in studying the theory of stock investing and getting some hands on training, under experienced stock markets pros. Two great introductory books on stock market investment are 'Security Analysis' and 'The Intelligent Investor' by Benjamin Graham, one of the greatest stock market analysts and the pioneer of the 'Value Investing' trading strategy. Follow up the work of master investors like Warren Buffett and learn from them. There is no substitute to experience when it comes to learning stock investing, but going to the masters for advice and trusting logic, rather than speculation will make your journey less perilous. When you believe in value investing rather than speculation based investing, though you may not always make big profits, you will certainly minimize losses.
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