“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” – Robert Kiyosaki. One of the surest ways to store your wealth, put your money to work, and ensure that you leave something behind for your kids is to invest in the stock market.
Investing in the stock market gives you part ownership in the companies whose shares you own. You get to earn income in the form of a dividend on your stock. The value of your stock portfolio increases as the underlying businesses continues to prosper. And your ownership of stakes in the business continues indefinitely for as long as the business is solvent.
Unfortunately, many people are not actively involved in the stock market beyond the exposure of their retirement funds, IRAs or 401K plans to market indices and low-risk ETFs. If you want to be personally involved in the stock market, this piece provides a concise but comprehensive guide on how to get started buying stocks.
1. Open a brokerage account
The first step towards becoming a stock trader or investor is to open a brokerage account. You can expect to fill out an application form, show proof of identification, and select how you plan to fund your account – you can fund your account electronically or by mailing in a check or money order. When opening a brokerage account, you may want to take cognizance of the minimum requirements at different brokerage firms. Most online brokerage firms will allow you to keep a $0 minimum balance, but traditional brokerages account can insist on a minimum requirement as much as $2000.
For your stock trading activities to be worth your while, you’ll also need to think about commissions when opening a brokerage account. The cheapest trading commissions are not necessarily the best, especially if you can’t access excellent customer service. Nonetheless, you can use the potential frequency of your trades as a yardstick to determine how much you should be willing to pay in fees and commissions.
Wall Street makes money off your activity because you’ll pay fees and commissions every time you buy/sell. Active traders might want to seek out brokerages with low commissions. If you plan to trade infrequently, you also need to be sure that your brokerage firm won’t charge you an inactivity fee.
2. Understand basic stock trading terms
After you’ve opened your brokerage account, you’ll need to understand the fundamentals of stock trading in order to make smart trading moves. You can start by learning the language of the stock market. You’ll come across some basic stock trading terms – and then, you’ll be befuddled by the combinations of those trading terms when market analysts start talking. For the most part, an understanding of the basic concepts should help you to navigate the market effortlessly.
- Ask: If you want to buy a stock, this is the price that sellers are willing to accept
- Bid: if you want to sell a stock, this is the price that buyers are willing to pay
- Spread: this is the difference between the highest bid price in the market and the lowest asking price
- Market Order: this is an order to buy/sell a stock at the prevailing spot price ASAP
- Limit order: this is an order to buy/sell a stock when it reaches a specific price
- Stop-loss order: This is a predefined instruction that executes a market order once the price of a stock rises or drops to a specific point
3. Select the stocks you want to buy
Now, that you’ve understood the language of the market, you’ll need to start picking the stocks you want to put in your portfolio. When you buy a stock, you buy ownership in the company that issues the stock and there two basic ways to make money from the stock market. The first way to make money is to maintain ownership of the stock and collect dividends every time the company distributes its earnings (profits) to shareholders. The second way to make money is to sell your stock once the share price increases, buy another stock, wait for the share price to increase, sell – and continue the cycle.
If you want to make money in the form of steady income, you’ll most likely be looking for the stocks of dividend champions, bluechips, and traditionally established companies such as utilities, industrials, and telecoms. If you want to make money mainly from share price gains, you’ll most likely be interested in growth stocks, momentum stocks in tech, healthcare, or emerging markets.
It is important to know that you’ll make some mistakes in your stock picking game – sometimes, you’ll just be unfortunate to hold a stock at a wrong time. When you discover that you’ve bought a stock that is permanently stuck in bear territory, you’ll need to swallow your pride, admit that you made a mistake, and cut the losers off.
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