Understanding The Stock Market For Beginners

There is a load of information out there, so understanding the stock market for beginners is not that simple. In this article, I will try to explain the basics that you probably have missed or interpreted them differently.

If you do not know where to start your investing journey then this article is for you!

How To Earn Money From The Stock Market?

Understanding the stock market for beginners can be quite challenging. You can expect to read a lot in order to learn and be proficient in a stock market language.

It all begins with understanding the goal of investing – earning money. There are 2 ways you can do that.

• Waiting for stock to grow in value

When you purchase a stock you purchase it for a price and if you sell it for a bigger price you earn a profit. Depending on a lot of things this can take minutes or years because stocks are volatile and they always go up or down in value.

If you invested in a whole market you could expect a 10% average growth per year from this strategy.

• Receiving dividends

Another option to receive money from investing is receiving dividends from stocks.

Some companies that have already grown to the stage where they do not invest that much in their own growth can start paying dividends to investors. Companies pay you a sum from their revenue to say thank you for staying with us.

Usually, you can expect to receive from 2% to 6% annually from a company. However, you have to keep in mind that not every company pays dividends, and if they pay out a high percentage it can be a bad sign and the company might need money.

What Is a Stock?

Once a company goes public for the first time it becomes available for all people to invest into. That means that a company gives up some of the ownership of the company away to attract investors.

Companies do that so they could grow faster or simply because the owner of the company wants to cash out without selling the whole thing. Nowadays it is not that easy to become a publicly traded company so I would not think that a lot of company owners would go through all that trouble just to make extra money.

When you choose a company and purchase its stock you become an owner of the company in a sense. You are not included in day-to-day operations but you are definitely a partial owner of the company. The percentage from one stock would be very low though.

However, in some cases, this can give you some advantages. For example, Tesla lets you ask them a question and the most popular questions will be answered by the management.

One more thing you should know is that the company‘s stocks are traded in stock markets and yes, there is more than one. Usually, there are different stock markets in each country. The most know stock exchanges are NYSE and NASDAQ.

In general, stocks can earn you higher returns than other investment alternatives. This includes stocks, index funds, and other ETFs.

Supply And Demand

Like in any other market, there is supply and demand for stocks. Because of this stock prices fluctuate every minute when they are being traded.

This economic model explains that if there are a lot of sellers there has to be the same amount of buyers that are willing to make trades on agreed prices. If there are a lot of people who want to sell, but there are very few people who want to purchase then the stock price drops till there are enough buyers. This also works the other way – if there are a few sellers and a lot of buyers stock prices rise.

The same thing applies to the products that companies sell. For example, when Covid19 started a lot of flights were shut off and people either did not want to go on vacations or they could not because of the restrictions. For this reason, the demand for flights was almost obsolete and the supply was huge. This resulted in some aero companies going bankrupt.

Portfolio Diversification

When understanding the stock market for beginners it is important to understand diversification. It means that you should not invest all your money in one place or one stock.

If you were to invest in only one stock all your fortune depends on one company and as you already know stocks fluctuate in their value a lot.

Before you even start to diversify you need to figure out what type of investor you want to be and what are your goals.

You also need to know when you will need the invested money. For example, if you are already in your pension then you probably want to get dividends and put your money where it would be safe. So, you would avoid risky, volatile stocks.

However, if you are in your 20s then you might want to aggressively invest in growth stocks that in good years can even get you 10x returns. Do not take this number for a fact as you would have to be extremely lucky. It is also possible that you would lose 50% of your money in one year.

Moreover, you have to decide what you would do if a company would lose 10%, 30%, or even 50% of its value. You need to have a plan for that. If you did your homework and this company is still worth investing then maybe you would want to put even more money into it as it sells so cheaply.

How Different Portfolios Performed Over Time?

There are a few investment options you can choose when investing. That is why the understanding stock market for beginners can be hard. All of them can be grouped by their potential return on investment (ROI) and their risk.

In investing world risk almost always is highly correlated with high returns – the higher the risk, the higher are potential returns.

Cash and Bonds

Both are considered defensive options that are considered safe. However, neither of them can offer you high returns.

Real estate, stocks, and alternative investments

In the same order, these investments get riskier and can offer higher returns. When talking about alternative investments this also includes cryptocurrencies.

When we talk about investment portfolios we usually talk about a mix of bonds and stocks. In the picture above you can see 4 different allocations of both investment types.

You can notice that mixing even a little bit of stocks in your portfolio is actually safer than owning just bonds as over the 100 years there were fewer down years in 20% stocks and 80% bonds allocation.

While investing everything into the stock market can get you the highest returns do you expect to keep your investments for 100 years? I know I am not so it might be too risky to put all of your money into only stock portfolios.

I recommend reading my other article – ‘Passive Investing With Index Funds‘

How To Read Stock Information?

There are a lot of great websites where you can see live information about key indicators of stocks. Yahoo Finance and investing.com are great examples of that.

I have marked a few parts in the screenshot above.

• Stock Name – you can either search for stock either by its name or short stock name in the brackets.
• Stock Price – it shows the current stock price, the change in price today (or last day), and the difference in percentages.
• Previous Close – a price at which the market closed the last time
• Open – a price at which the market opened last time
• Bid – is the price that someone is trying to sell times stock quantity
• Ask – is the price that someone is trying to buy times the stock quantity
• Day‘s range – shows today‘s lowest and highest traded prices
• 52 Week Range – sow  lowest and highest traded prices over the course of a year
• Volume – how many shares were traded today
• Avg. Volume – how many stocks are traded in an average day
• Market Cap – how much is this company worth
• Beta (5y Monthly) – This one is very interesting! It shows the risk of this stock. If this ratio is 1 then a company moves together with the whole market up or down at the same rate in a month‘s time. Lower than 1 like in the example means that this stock makes more minor adjustments, thus it is safer. If the ratio is above 1 then a stock is riskier than average.
• PE Ratio (TTM) – Price per earning ratio for the last 12 months. If the ratio is below 25 then generally it is an indicator that it is a good stock for buying as it is not overpriced.
• EPS Ratio (TTM) – Earning per share ratio for the last 12 months. This ratio shows how much money a company earns per share.
• Earning Date – shows the next date or dates when earnings for be publicly announced.
• Forward Dividend & Yield – show how much dividends the company pays. If it is N/A, then a company does not pay dividends.
• Ex-Dividend Date – show when dividends will be paid. Again, if it shows N/A then the company is not paying dividends.
• 1y Target Est. – it shows what analysts think the company‘s share price will be in one year. However, you should never trust these numbers and use them just for indication.
• The Chart – you can expand it and do a technical analysis according to it.

Understanding Stock Charts

If you are a technical person and like numbers, stock charts may be interesting to you. If not, then don‘t worry – value investors do other kinds of analysis.

The stock chart shows how a company‘s price is doing in time.

Understanding stock market for beginners can be hard, so I wrote a different article on this topic. I suggest you read my article – ‘calculate stock price‘

What Type Of Investor Do You Want To Be?

When investing and trying to deal with life it is likely that you will not be able to make every kind of analysis on stocks so it would be a good idea to choose what you like most.

• Scalper – You are interested in how much the price changes in minutes.
• Day trading – You are focused on the changes that happened in the last hours.
• Swing trading – You are doing an analysis of how the price changed in a few days.
• Position trading – You are tracking prices that changed over the course of weeks.
• Part-time – When you have less time you are checking how prices changed over a few months.
• Buy and hold – fewer exits in total.

It is not only how often you trade but what tools are you using. Technical analysis is used for scalper trading whereas fundamental analysis is used for buy and hold strategy.

How To Pick A Broker?

To invest in the stock market you will need a broker – a person or a company that makes purchases and sells in the markets. You would need a license to do it by yourself, so you cannot avoid this step.

In general, I would suggest you against a freelancing broker because he or she has zero interest in you earning money as they receive money when you make a purchase or sale. So, I would trust nothing they told me.

On the other hand, there are a lot of online brokerage companies where you could trade stocks with low fees, or even in your own bank if it offers you this option.

Questions you need to ask when choosing a broker:

• Is it available in your country and currency?
• Can you trust a broker?
• How often are you going to trade?
• Do you like the user interface?
• What account types are available?
• What are the account, trading, and miscellaneous fees?
• Is there a test version?
• What analysis tools are available?
• Is there a paper trading ability?
• Does the broker offer some sort of education?
• How easy it is to move funds in or out?
• How good is the customer service?

A few I have used or I am using right now are Interactive Brokers and Revolut. Both of them are really established and Revolut just got a bank status, so it became a lot safer than it was before.

Understanding Stock Market For Beginners Conclusion

• Before investing you have to get familiar with investment terms and tools
• You have to decide on your investment strategy
• You have to decide what type of investor you want to be
• You have to pick a broker to trade stocks

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