Introduction to Stock Market- Turn on the TV news or open a newspaper, surf the internet or listen to the radio, and you will probably come across some information about the stock market: “The Dow Jones closed at record highs”; “The S&P 500 is trading down two-tenths of one percent”; “The stock market is reacting to news from Washington.” The stock market seems to be everywhere in our daily lives, but what exactly is the stock market? And, what are stocks that are bought and sold in this market? What does it mean for you, for your employer, or for your country’s economy when the stock market had “a good day”?
Stocks – sometimes referred to as equity or equities – are issued by companies to raise capital in order to grow the business or undertake new projects. There are important distinctions between whether somebody buys shares directly from the company when it issues them (in the primary market) or from another shareholder (on the secondary market). When the corporation issues shares, it does so in return for money.
There are many ways you can make your stock purchases. Each comes with its own advantages and disadvantages. If you have little or no stock buying experience then you may want to first educate yourself as much as you can. We suggest you take up focussed crash courses or professional training before you start investing your real hard earned money.
Sorry if it seems we’re stating the obvious, but you never know (remember the person who did everything to set up his new computer – except to plug it in). Find a good online stock broker and open a stock brokerage account; even if you already have a personal account, it’s not a bad idea to keep a professional trading account separate. Become familiar with the account interface and take advantage of the free trading tools and research offered exclusively to clients. Some brokers offer virtual trading (more on that in step five).
Start to follow the market every day in your spare time. Get up early and read about overnight price action on foreign markets. (U.S. traders didn’t have to monitor global markets a couple of decades ago, but that’s all changed due to the rapid growth of electronic trading and derivative instruments that link equity, forex and bond markets around the world.) News sites such as Yahoo Finance, Google Finance and CBS MoneyWatch serve as a great resource for new investors. For more sophisticated coverage, look no further than The Wall Street Journal, Bloomberg and, well, us at Investopedia.com. TV is another way to monitor the market each day: CNBC is the go-to financial channel.
Study the basics of technical analysis and look at price charts, thousands of them, in all time frames. You may think fundamental analysis offers a better path to profits because it tracks growth curves and revenue streams, but traders live and die by price action that diverges sharply from underlying fundamentals. Do not stop reading company spreadsheets, because they offer a trading edge over those who ignore them. However, they won’t help you survive your first year as a trader.
It’s now time to get your feet wet without giving up your trading stake. Paper trading, aka virtual trading, offers a perfect solution, allowing the neophyte to follow real-time market actions, making buying and selling decisions that form the outline of a theoretical performance record. It usually involves the use of a stock market simulator that has the look and feel of an actual stock exchange’s performance. Make lots of trades, using different holding periods and strategies, and then analyze the results for obvious flaws.
While experience is a fine teacher, don’t forget about additional education as you proceed on your trading career. Whether online or in person, classes can be beneficial, and you can find them at levels ranging from novice (with advice on how to analyze the aforementioned analytic charts, for example) to pro. More specialized seminars – often conducted by a professional trader – can provide valuable insight into the overall market and specific investment strategies; most focus on a specific type of asset, a particular aspect of the market, or a trading technique. Some may be academic, and others more like workshops in which you actively take positions, test out enter and exit strategies, and other exercises (often with a simulator).
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