It is common sentiments from financial gurus and even by our personal convection to know or at least know why you are buying or selling such financial instruments – stocks, bonds, mutual funds, futures and all. And that is true, always know what you are doing and know why. You don’t want to be at the rear losing end of your personal finance where it’s to late for you to ask the whys and the hows of your financial disasters.
Do you know that the most elementary way of knowing what stocks to invest into is your daily consumerist lifestyle? If you have been to a place or restaurant where you noticed people are gullibly treating themselves with a can of newly brewed Coca-Cola products. And you noticed that most of them are paying using a certain credit card owned by a large credit company, this might give you a hindsight of what company you might invest into later on.
Unfortunately though, some of us tend to buy stocks under the emotive influence of a water cooler chatter courtesy of your barber, buddy, stranger next door or the mainstream media. Fortunately, there is no easy way buck. Because if everything is easy come, then everything is easy go.
In knowing what to buy is also in knowing what to not buy. A water cooler chatter stock is definitely a not-buy option. Remember, even the most experienced and seasoned stock traders are littered with losses along the way, how much more a hyped-up fear-of-missing-out (FOMO) greenhorn trader among the many.
Knowing why you buy a stock or invest in such a company must at least be of itself or and for itself. Why you buy such company? Maybe because it is a blue-chip company? Maybe because it has a redoubtable solid financial statement? Or maybe the company is in an uptrend rally in the recent 52 weeks in the market?
These are just few of the baseline schematics in knowing what and why you should stake your hard earn stash in the stock market. Note however, that their is no such thing as foolproof enterprising action in the market. Every move you take should be garnished with cautious optimism and a grain of salt. None so far, in the history of stock market trading, did an experienced trader never incurred losses. They did, and if they do. What is your chance?
“Stock Investing with a purpose of buying your dream house, car or dream education within a year or two is not adviseable. The recommended timeframe for stock investing is at least 5 years. Except perhaps if your capitalization is big enough to gain significant amount in couple of years.“
Know also, that there are grossly two kinds of buying and selling in the stock market – Stock Trading and Stock Investing.
Stock trading is basically the faster version of Stock Investing. Put it this way, stock trading is like driving a fast car on fast highway. A car running at 200mph arrives much faster in the desired destination but the chances of that car incurring a car crash and head-on collision or whatever is much much more probable than a car running at a speed of a snail. Stock trading can be Scalping, Day Trading, Swing Trading and Position Trading.
Seconds to minutes. A kind of trading that is adrenaline inducing and stress forming. Not the kind of trading if you want passive income for a month or two. This kind of trading is highly active. Besides, the probability of you earning is high and frequent, but that is more often outweigh by counter losses. You can’t be in this kind of trading if you have a short-fuse tolerance with financial losses.
Hours to a days. A little slower than scalping. Typically, a trader opens trade when the market opens and closes all trades when the market closes. Though called day trade, a trader can choose to close his trade intraday or hours within the day if his projected margin is hit. You still can’t be in this trading if you have less tolerance to loses and you are into a full-time job.
Days to weeks. Also called Momentum Trading. The trader basically exploits the trend of the stock price action either buy or sell for days and weeks. Can be considered the middle-of-the-road trading. You need to be in this trade if you want added passive income and you have full-time job. Favorably a good side-hustle income addition.
Weeks to months/year. Cannot be less than a week, but technically not more than 5 years. But in essence, this is the longest trading position. Traders in this domain check for more stable companies (otherwise known as blue-chip companies) and assess its 52-week stock performance and should favorably be in an uptrend movement, also known bull run. You need to be in this trading domain if you need to leverage your surplus income long-term.
We prefer to call this investment as “Patience-Is-A-Virtue” investment. This stock investment runs not less than 5 years and to forever if you want to. Study shows that long-term investment is more profitable in the long run than any other trading classes.
So, how do you actually earn if this takes a really long time to gain?
Well, think of scalping or day trading where you enter and exit the market several minutes or hours daily. First off, in trading your probability of losing is almost second nature, though your probability of earning is frequent. At the end of the day if you sum it all up, some traders finished strong, some others break-even and some (even most) end up incurring loses instead of gain. Let’s say, you finished the trade break-even with little gain, question is, will that be able to pay the stress and the head-ache you have taken on during the day?
In investing, you might virtually not notice your gain since you are not getting tabs on your stakes as often. In fact, investors check their stocks on quarterly basis. Of course, long-term investors incur momentary loss. But they don’t mind since they are investing on the long-term trend of the market not the short-term trend the traders are vying on. In fact, go check a blue-chip company, like Apple, Netflix, Tesla and the likes and lay down the last 5 years of their stock performance.
You’ll see that the overall trend is going up. Of course, their are some rough edges along the way, and this is where quick traders get mangled. But for investors, they just shrug and dust it off since the real pecuniary target is way up there – at the end of the rainbow.
Again, don’t think of the stock market, neither blue-chip companies as foolproof. Or you’d be a fool to consign your whole financial welfare to it without a doubt. As always, financial portfolio diversification is another name of the game in the wild world of the financial market.
Secondly, traders constantly pay broker fees (also known as spreads) every time he or she closes or opens position. And this does not include loses, since either you gain or loss you still incur broker fees.
But is trading all that awful? Not exactly.
It’s funny that you can have both worlds if you want too. Trading is fun and financially gratifying only and only if you have high tolerance to stress, odds on your side, you are expert/experienced and loses are not even an issue to you. If you like trading for its own sake, gain or loss, no problem.
Before we delve down into basic stock types, you need to know about a company’s market capitalization. Basically, these are amount of stocks or shares a company has staked in the stock market by going public, also known as IPO – Initial Public Offering. Each company share has price to it like 1 Share of Company A will cost you $10 (each share). More often, a company requires you to buy 20 shares before you’ll be able to invest in that company, thereby costing you $200 on initial investment. This also known as board lot.
“Say, a public company with 40 million outstanding shares that trades as $20 each will have a market capitalization of of $800 million.
Large Capitalization: $5 Billion
Mid Capitalization: $1 Billion – $5 Billion
Small Capitalization: $1 Billion – $300 Million
Micro Capitalization: Below $300 Million”
These stocks are usually owned by large companies with large capitalization. They are well established companies that don’t get rocked badly when some tumultuous event happen to the economy or the society at large such as natural calamities, pandemic and political turmoil. Example of these companies are Apple Inc., Walt Disney, Coca-Cola, Intel, Starbucks, Microsoft and others.
These are also the companies with steady growth overtime. Thus sporting a long-term uptrend on the stock chart. This makes this companies ideal for long-term traders and investors.
These stocks by namesake are growth focused. They are the stocks that grow rapidly more than what the whole economy did. It’s because the underlying company is doing well on their product and services, research and development. Unfortunately, in some rare cases their growth is their downfall. Because they tend to be overvalued sending a mixed or wrong signal to investors. So, it’s a bit riskier to invest in this kind of stocks.
Small Cap Stocks are from small emerging companies as obvious. They are even considered today’s puny but tomorrow’s somebody – or nobody. Small Caps tend to be very volatile in the marketplace, but the safer way to invest to it is through aggregated or managed funds such as Mutual Funds, ETF, Hedge Funds and UITFs.
Large Cap Stocks however, differ just a bit with small caps in cases of capitalization. These companies are also grouped into aggregated funds also. They are ideal for long-term investment, though they have slower but steady growth.
Cyclical could be the definition of most stocks. When the company took good momentum, the stocks shows off positive trend. And when the economy wobbles, it shows bad trend. Mining sectors are one of these companies.
Defensive Stocks are stable in a sense that they have deeper root in the society in it’s utility and usability. This includes companies nearest to your gut. These includes food companies, medical manufacturing companies, water distribution company, electrification companies and others.
Value Stocks are stocks that are actually undervalued at first. You might want to ask Warren Buffett about this for your own information. The advantage of value stocks is that they are at reasonable price, in fact, lower than expected. And the pure gold is when the company starts to assert its real value in the market, massive wealth is made. Again, Warren Buffett is in the forefront of this.
Income Stocks otherwise known as Dividend Stocks, it is an income that is distributed by a company to shareholders when a company profited considerably. Income stocks has low volatility, higher-than-average yields and steady income as well. Surplus income is invested back for the company.
Speculative Stocks by namesake is speculative. Speculative stocks may show overvalued stocks but in reality don’t have real assets to back it up. The company still has to prove their worth, making it risky investment. Though speculative stocks promises windfall profit due to its higher volatility, but if you insist, what will be your chance?
SRIS (Socially Responsible Investing Stocks) could partly been inspired by environmentalists and health advocates. SRIS investors favor companies with positive influence to the society and the
Preferred Stock holders get paid in dividends. They may not have the voting rights for the company, but hey have all the financial controls at their fingertips as opposed to Common Stockholders who has the political compass of the company but are second in priority pecuniary speaking. Thus the word preferred. If you need to invest and learn more about preferred stocks, dig down here »
These stocks are technically $5 below per share. Companies with penny stocks usually has micro capitalization less than $250 million. Most of these companies, but not all, don’t have solid financial records to hold on to. Penny stock tend to be very volatile and ominous at most. But adventurous traders found these stock classification as treasure trove, paddling on both canoes of volatility and dirt-cheap price is just the way to go.
Since penny stocks are cheap you can buy as many shares as you can (as compared to blue chips where board lots are killing you) and since it’s volatile, one major price action within the day is all it takes to rake those profits to the bags. However, unscrupulous investors do untoward movement by hyping-up certain stocks at stake. They called this “pump and dump”.
By pumping, they are able to raise the value of the penny stocks in a unwarranted way. By dumping, they are able to take the profit at the desired level. This causes the stock price to plummet radically. Now, your glory days will be short-lived and over once you are left at the top of the chart while the price nosedive.
Stock options give you the option to buy and sell stocks at a given time. The only caveat about options trading is its expiry. Your stock option must have definite price action on a given time. So, stock movement is of the essence. In some options derivative, if the stock goes up you do a buying option – also called “Call Options”. If the stock goes down, you do a selling option – also called “Put Option”.
A little elaboration about Options Trading here » or better yet start your trading ventures here »
There goes your basics of stock trading!
If you think this is exhaustive enough, nah! We’re not even at the tip of the iceberg yet. Stock trading, in a deeper note, is complex and challenging to learn not withstanding the financial debacle you’ll be into if you are not cautious about your decisions and actions about.
But don’t let this few last words intimidate you. Successful traders and investors are always intimidated the first time they set sail into an uncharted territory, not until they found gold in it.
To generally learn more about Stock Trading and all bloody stuff about it, visit: Investopedia
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