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The Definitive Guide To Getting Started In The Stock Market


Written By Soo L.
Image By cowlet
Tags investing, stock market, stocks, broker, research, risk,

Interested in investing in the stock market, but just don't know how or where to start? It might be easier than you think. In this guide you will learn every step necessary to get started in the stock market. As a word of caution, if you can't afford to lose any of your money, you should not invest in the stock market. There is no sense in risking money you can't afford to lose in the first place.

Finding A Broker
A broker is your middleman between you and the stock you buy and sell. To find the right broker, you have to first ask yourself a few questions about how you will invest your money.

Online Vs. Offline? Are you more comfortable in an online or offline environment? If you're more tech savvy and don't need to work with a real human being, you might want to start an account with an online stock broker. The main advantage of having an online broker is independence and price. Because you don't have to deal with people to make your transactions, the overhead for the brokerage is lower, which translates to lower commission fees. But if you're someone who would rather have a more standard offline broker, there are still advantages to that too. With an offline broker you can get more advice and guidance in the decisions you make with your money.

How long will you plan to hold a stock? Decades? Months? Weeks? Minutes? The frequency of transactions you make through your broker should be considered before opening an account with a broker. Some brokers offer a fixed transaction fee for every time you buy or sell a stock. These brokers cater to most individual investors regardless of holding period. Other brokers offer a very low fixed fee for each stock transaction, but charge a monthly fee. These brokers cater to those who make many stock transactions per month. The less fees you pay, the more profit you make (or the less losses you will take).

What is your experience level? How much do you know about the stock market? Can you do your own research or do you need the assistance of another person. Try calling each of your potential brokers to see what their customer service is like. It is important you find a broker that can help you if you need it.

How much information will you need? Many brokers offer information tools for their customers. I have found that these tools are mediocre at best compared to some tools that are offered for free online. It is convenient to have access to a lot of information through your broker, but if you can use free resources online, you might find a cheaper broker.

Researching
Feeling lucky is never any reason to invest in the stock market. Thorough and complete research is necessary before making any buying or selling decisions in the stock market.

Indices To start, familiarize yourself with the major US indices in the stock market: the Dow Jones Industrial, the Nasdaq, and the S & P 500. Each index represents the sum fluctuation of many different stocks in a particular category and can give you a good overall view of where the stock market is moving. One important thing to learn is the size of each index. Most of the time, index price movements are reported in points instead of percentages. If you don't know how large an index is, you won't be able to tell if a 100 point increase is a good, bad, or average. But the main reason to familiarize yourself with the major indices is to get an overview on the market. A rising tide lifts all the boats in the harbor.

Industries and Sectors Next, familiarize yourself with each industry and sector in the stock market. Knowing which industries and sectors are in favor can help you make better buying and selling decisions. Again, like with the indices, a rising tide lifts all the boats in the harbor.

Individual Stock Analysis After learning about the major indices, sectors, and industries, the next step is to learn about actual stocks. The most important thing to know is the relationship between the earnings and the price of a stock. Earnings contribute directly to a stock of a price. The more profitable a company, the more it will be valued. This is perfectly logical, and because it is so logical, there is a ratio that is often mentioned when talking about stocks called the "Price Earnings Ratio" or, more commonly, the "P/E Ratio". The price earnings ratio is the price of the stock over its earnings. Many believe that the lower the P/E ratio the stock is, the better the stock. I do not believe this because the P/E ratio is a completely relative value. There are two kinds of P/E ratios that are not so often mentioned or discussed but are very important: the "Forward P/E Ratio" and the "Trailing P/E Ratio". The Forward and Trailing P/E Ratios consider past and future earnings, which can give you a better idea of where a stock is headed. By learning what the forward P/E ratio and the trailing P/E ratio of a stock is, the better you can gauge the value of a stock relative to its past and future earnings.

Further your research by learning about other important ratios and figures of a stock. The "key statistics" page for each stock on Yahoo! Finance does a great job of summarizing the most important ratios and figures of a stock. If you understand what each ratio and figure represents and can easily compare these ratios among several stocks, you'll be able to research stocks with confidence.

Buying and Selling
Once you have an account, and understand how to research a stock, the next step is to start buying and selling stock to hopefully turn a profit.

Psychology and Discipline Buy low, sell high, as the old saying goes. This is much easier said than done. In the current internet age we live in, it is far too easy to keep up with the stocks you are holding, or are interested in holding. Minor whipsaws in the stock market can cause unwarranted buying or selling. Being able to master your impulses and discipline yourself is a very important part of investing in the stock market. Many contend mastering the stock market is more an issue of mastering one's own self than anything else.

Entries And Exits There are many entry and exit strategies in the stock market. The most basic one involves basic trending movements. When a stock trends upward or downward, its price may move in a channel as seen in the picture below:

Above is a six month chart for nVidia Corp (NVDA). As you can see, it exhibits a clear upward trend between the months November and May. The price moved neatly in a price channel with clear support (green) and resistance points (red).

Buying when the trend forms and selling when the trend breaks would work as a basic entry exit strategy. Of course, now that we can see and examine this chart, it is easy to identify the trend and say: "Oh, if only I bought here and sold there". Correctly identifying a developing trend is one thing, but having the smarts to act on it is a completely other issue. This goes back to psychology and discipline.

Another thing I should mention. When people mark up charts, there is almost always a heavy bias. Charts can be marked up with all sorts of complicated and often times unnecessary indicators to try to convince people of one thing or another. In the charts above, I try to convince you about the reliability of a trend, when the same chart can be marked up to tell a different story. Always be weary of how stock charts are marked up and manipulated.

Money Management and Risk Control Money management is asset allocation. Where should you put your money? How much money should you put in each position? How much of whatever stake you have should you risk before selling and moving on. A good risk control strategy limits the amount of risk you have by taking a position. It's best to set a certain total capital risk percentage for each position you take. For instance, let's say you want to limit yourself to risking only 1% of your total capital for each position. With this limit, you can put all of your money in a single position and sell if the stock goes down 1%. Or you could put half of your money in a single position and sell if the stock goes down 2%. In both cases, you're only risking 1% of your total capital. Sound money management and risk control skills are vitally important to protecting your capital. For those of you who like to crunch numbers, this will be easier to learn and apply than for others.

Some General Warnings
As an individual investor, the odds are stacked heavily against you. This is why I urge in the beginning to never invest anything you cannot afford to lose. Start first by investing using a fantasy stock trading game before trying the real thing.

Never believe people who claim guaranteed profits in the stock market. With all of the corruption on Wall Street, it saddens me that there is even more corruption by spammers and scammers who deceive people out of their hard earned money. A product, service, or tip might work once or twice, but nothing can beat thorough research, self discipline, and a sound money management, and risk control strategy.

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