If you are keen to know on investing in stocks, it is imperative to know the basics.
If you are not aware of the basics of investing in stocks, it can rather be a challenging task.
All the live market commentary on business channels or the business pages may appear like gibberish to you.
The market is a complicated animal.
The stocks, their journey, the price swings all form a confusing labyrinth.
For effective investing in stocks, you have to learn how to break it best.
This is where an active understanding of the basics help.
Terms like earnings momentum, support, and resistance are thrown around like it is common knowledge.
This is what confuses the average investor the most.
The problem is that most of us know that investing in stocks yield high returns, but we have never bothered with basics.
As they say, the devil is always in the details.
If you do not pay enough attention, the stock market can actually overwhelm you with its intricacies.
So here is a quick lowdown on the overall basics of investing in stocks.
From the important terminology that you must pay attention to the kind of trades you undertake, there are many details.
This is also aimed at helping you grasp the basic concepts of investing.
The idea is to empower investors with knowledge and create an appropriate channel of communication.
The effort is to help you undertake smart trades with assured returns over an extended period.
You are exposed to the stocks in every possible way even if you are not trading directly.
So this quick guide will help you book profit like professionals with your investments.
What Are Stocks and a Stock Market?
Before we delve any further into the basics of investing in stocks, it is essential to understand what stocks are?
That will also help us in the next step of investing in them.
Stocks are also known as equities and are issued by companies.
The primary aim is to raise capital by selling these shares.
These stocks offer a certain amount of ownership in a company.
But this does not mean you have any control of the assets of the company.
You get a right to attend shareholder’s meet, get dividends and sell it if you want capital.
So in many ways, the shares help you channelize your savings in the stock market.
The value of these shares or stocks keeps rising or falling as per market dynamics.
Individuals can gain or lose money on the basis of the position they have in the stock market.
So what is the stock market?
Well, this is a marketplace where many stocks are traded.
The stock market is mostly driven by the complex demand-supply matrix.
You have a group of interested buyers and sellers who huddle together.
There is one party who is interested to sell and other wants to buy.
There is no limit to how much an individual can buy or sell.
However, they will have to make do with whatever is available in the market.
Some pre-determined amount of stocks is available in the market.
All the trading happens with this amount.
If supply is more and the demand less, the prices will fall.
The opposite happens when demand for these rise above supply.
The price is, therefore, constantly moving.
That is exactly how the trading proceeds in the stock market.
This is undeniably the basic premise of most stock investment.
How Does Trading Happen?
If you are interested in investing in stocks, you have to understand the trading.
Though the broad principle is interplay of demand and supply, it is not all.
The actual trading process is slightly more complicated.
You have to understand that the stock market is actually the secondary markets.
Individual stock owners and interested buyers get together to transact in stocks.
You have to remember the actual company to which the stock belongs is not undertaking any buying.
The buyers and sellers invest in it independently in the hope of higher return.
The first stock markets can be traced back to 16-17th centuries in Europe.
But at that time you did not have so many listed companies.
These exchanges at that time thrived primarily in key cities and hubs like London, Antwerp and Amsterdam.
Though the stock exchanges in US are in prominence today, they came into being only towards late 18th century.
The most famous one, NYSE was established in 1792.
That can also be considered as the start of the modern stock trading traditions.
That also meant the introduction of rules and regulation to monitor the trade.
Regulations became a necessity to undertake modern stock trading.
This is what made investing in stocks a fairly reliable affair.
It brought in relative transparency in the whole deal and created a conducive condition for active exchange.
It created a fair pricing atmosphere and encouraged investors to put their money in stocks.
The Dow Jones and S&P 500 are among the most well-known Indices in the stock market.
Most times, when we are talking of markets hitting a key level, it is actually these indices breaching those levels.
They are a collection of some key stocks.
They act as an important benchmark for the market.
Difference Between Investment & Speculation
Now when you get down to actual trade, there are two types of positions.
You can either be investing in stocks or speculating in it.
On an average, speculators are seasoned market players.
They also, at times, have access to inside information.
As the term indicates, speculation is generally taking a guess about where prices may head next.
They then place bets on the basis of that guesswork.
Here the ultimate idea is not to seek intrinsic value, but take advantage of quick price appreciation.
The intent and the objective, in this case, is primarily the quick appreciation.
Investing in stocks is a different ball game.
In this case, investors undertake proper analysis, fundamental or technical.
On the basis of that, the price trend is decided then.
So if the expectation is that the stock will rise further, investors will take a position and wait for the gains.
If the stock price is expected to slip, investors may short it or even wait for the better entry point.
So the fundamental difference between the two approaches is the objective behind it.
The first one tries to cash in on the price differential on the basis of some inside information.
But in case you are investing in stocks, it is a well calculated and gradual process.
There is a gradual and well-calculated decision making at play.
The core idea is to make sure that you do not lose money and choose stocks wisely.
The investors want to optimize the value of every penny they are investing in the market.
The primary intention is to take advantage of the higher returns that the stock promises.
This is how they want to increase the money they are investing in the market.
So it helps generate higher returns on investment.
How to Value Stocks
So when you plan on investing in stocks, you must know how to value stocks.
This is one of the basics that you have to be aware of.
Otherwise, it may be difficult to ascertain whether a stock is fair priced or expensively priced.
Even in terms of deciding on entry points in the market, it is difficult without adequate knowledge about stock valuation.
But the question now is how you ascertain this value?
What will be the basis on which you determine a stock’s worth?
Well, primarily this is a function of the supply-demand matrix.
So the market helps determine the stock price.
For example, if the stock is trading at $50 right now and the fair value is $100, it may be worth buying.
But conversely, if the fair value is seen around $30, investors may avoid it.
But the question here is who decided the fair value of the stock?
Did the company decide it or the investors?
Was it a corporate call or a speculative stance?
Well, if you ask analysts, there are many ways to calculate this value.
One simple method is to take into the overall business in consideration.
You combine the value of assets and deduct the depreciation and loans.
The other is, of course, taking into consideration the projected earnings estimates.
You can determine the value on the basis of both of these factors or devise your unique way to.
But remember, a stock’s value does not fall or rise overnight.
Both the upward movement and the down move are gradual and steady.
So, an alert investor will look for the warning signs and act appropriately.
This is what will help them stay ahead of the curve.
This will also help you realize better value.
How to Read Stock Quote?
This is another important basics of investing in stocks.
Valuing the stocks is worthwhile only when you are able to read the quotes appropriately.
Reading stock quotes appropriately is more of practice and effective application.
Apart from the stock name and symbol on the exchanges, there are several other elements too.
This is fairly straightforward.
The name of the company to which the stock belongs is spelled out completely or abbreviated.
Every stock trades with a specific symbol on the exchanges.
It is its unique identity on the bourses and referred to by that only.
For example, the symbol for Amazon on NYSE is AMZN
3. 52W High & Low
The 52-week high and low prices are key indicators of the trend in the stock.
4. Intra-day High & Low
This lists out the highest & the lowest points the prices touched during any trading session.
If the share issues dividend, this gives you the annual dividend you can expect.
In case this area is empty, it means that the company does not issue the dividend to its shareholders.
6. Price-Earnings Ratio
This is a key valuation metrics.
It gives investors an idea about the stock’s worth going forward.
7. Current Market Price
This is, of course, the simplest of the lot.
It gives you an idea of the current price at which the stock is trading.
8. Closing Price
This mentions the closing price for any given session.
What Is a Bull & Bear Market?
When you plan to invest in stocks, there are few more basics that you must get clarity on.
It is with regards to the trend in the market.
When you assign the value to a stock, this is also a very important consideration.
This is ultimately what goes on to decide the bull and bear market.
The final value of the stock is closely linked to this key element.
Imagine a bull charge, it is fierce focused and keeps moving forward.
Now when the same thing happens in the stock market, it is referred to as the bull market.
This is generally a phase of upward movement in the stocks.
The prices are rising, the investor sentiment is buoyant, and almost everyone is awaiting the next level.
The bull phase is generally accompanied by strong economic growth too.
That also, in many ways, helps maintain the positive momentum on the street.
In case of a bear market, the stock prices are seen falling.
Typically the bear analogy is more with respect to the fear that it generates in the market.
There is that blood-chilling fear of more losses coming your way.
The good news for investors though is that the bull phase typically last longer than the bear markets.
Recent investors may have all heard about the bear market, but they have not really experienced it.
On the other hand, we are already in the grip of 2 consecutive bull charge in a matter of 20 years.
Even if you see the Index value, they have yielded significantly higher returns over the longer term.
There is hardly an example of Index declining in value over a 15-20 year period.
But both the bull and bear phases are cyclical in nature.
One follows the other over the longer term.
Crash vs Correction
Even though you may not have frequent bear phases, a correction in the market is not unheard of.
In case the stock prices have seen a huge run-up, there can be short phases of correction.
The term correction means a phase where valuations calibrate.
This is more like an adjustment.
Often the Indices undergo several rounds of correction before they rise to the next level.
This is how the terms like support and resistance came into existence.
They are the levels where an Index or a stock may experience support or resistance.
Once the particular security has tested these levels, it prepares for the next level of upward r downward movement.
As a result, correction can be applied to both price appreciation and depreciation.
Supposing the stock is overvalued, it corrects and slips to lower fair value levels.
But if the stock is undervalued, it will rise to fair value levels.
That means it is about any small or significant change in stock prices to maintain a balance.
The market establishes order with the help of the market forces.
That action is referred to as correction of stock valuation.
But the crash is something quite different.
It is dramatic, deep set and often leaves investors scarred for generations.
Imagine two cars crashing!
Well, that is pretty much how the emotions pan out in a market crash.
The market devalues sharply and suddenly.
The extent of a crash can be anywhere between 10-20%.
At times, it can be even higher like 1987, the markets crashed 23%.
I am sure you remember the most recent crash in 2008.
The Dow slumped a whopping 500 point in a single trading session
Sometimes these severe crash in market levels starts off bear phases.
The triggers for the crash can be varied.
Therefore, the basics of investing in stocks are primarily about creating awareness about the various market elements.
You may have heard that investing in stocks can be very rewarding.
But that is only possible when you get the market basics right.
These stocks basics create the foundation for a meaningful investment opportunity.
This is exactly why mastering the basics of investing in stocks is the first step towards a financially enriching career.