Investing in stocks is a popular way to earn money which helps you to make enormous profits. Other investment strategies have different approaches to making money from stock trading. The main task is to find one that suits your personality and expectations from the market.
Such investing is a risky and confusing approach for a newcomer. If you want to participate in the stock market to make money, you must know some basic facts about this marketplace and the asset types.
This article covers basic information about the stock market. So you have a clear concept about your goal. We also make a list of the top three steps for beginners, by which you can start your investment way.
Understand your goal
Investing in a particular stock means having ownership of a tiny portion of a company. When the price of a share increases, the value of the investment increases.
How does the investment value increase?
There are different ways to anticipate the future value of a stock that a trader should know before investing.
- You can choose a stock and invest in it with your research and strategy. This process involves doing your research and investing in some potential stocks by measuring some investment criteria. If you don’t want to invest with your knowledge, you can allow an expert to manage your fund. Many brokers and financial advisor companies provide such support where investors can get tips and suggestions.
- Another investment goal would be the 401(k) investment or retirement funds. This type of investment involves small contributions periodically such as daily, weekly, monthly. It is a proven way of investing; additionally, unlike individual stocks, this type (401k) of investment allows investment in mutual funds most of the time.
First, you need to spend time researching and making decisions for your goal.
Prepare for risk and volatility
A stock market is a place for opportunity and hope from which investors can earn enormous profits from investing. Making money from this market depends on how an investor is earning money, even if the market remains volatile. An investor should have a proper trading plan to deal with the volatility and risk involved in stock investments.
For example, suppose you buy a stock for $20 and sell it when it becomes $30. In that case, you have to prepare for a drawdown, like the buying value of $20 may decrease to $10 with losses. So you have to choose stocks wisely before making any investment.
Mutual funds are comparatively less risky and volatile than individual stocks. You can reduce your risk by focusing on a long-term goal. For several decades the average stock market has been gaining by 10%. So if you focus on the long-term goal, you may achieve fewer profits than investing in individual stocks, but the risk is also less.
Another type of investment, such as a retirement fund, may provide an 80% return expectation in 20 years. Although the return is low compared to stocks, traders may target 5-6% monthly.
Top 3 steps to invest in the stocks
Let’s reveal the steps of investing.
Choose an account
First thing first, you need to have a trading account to invest in the stock market. Opening an account is related to brokerage and your investing style. Before opening an account to any specific brokerage, you must know what your investment type is. More specifically, you want to invest in stocks independently or try to do it with a robo advisor.
The quickest execution is a less expensive way to buy or sell stocks or other options you will get from opening an individual brokerage account. You can also open a 401k account with the brokerage to contribute and withdraw profits after reaching a predefined level.
On the other hand, you can take the robo advisor service, which allows you to have passive income. Robo advisor holders don’t need to do any analysis or research in their trading. When you open this type of account, you can choose your return goal and set options. They will do the rest for you, purchasing stocks and account management. Most of the robo advisors charge nearly 0.25% of investor’s accounts.
There are two types of stocks you can buy generally. You can buy an ETF or a mutual fund available at the stock market. Both of these investments involve purchasing a tiny portion of different companies’ shares at once.
For example, when buying the Standard & Poor 500 fund, you get a small number of companies. By investing in these stock mutual funds, anyone can manage several funds of this type.
Again if you want to invest in any individual company, you will have ownership of a tiny portion of that company. You can manage to buy any share or a few shares of your target company through your brokerage. Some tech stocks like Google or Facebook have experienced rapid growth recently. Some of the growth of the individual stock is also similar to the mutual funds.
The above image shows the basic chart of Facebook stock where the primary idea is to buy the stock from low and benefit once the price moved higher towards your target level.
Secure your investment
After investing in any type of stock following above, you should revisit your investment portfolio and check if the goal is secure. Reviewing your portfolio is essential to understand your progress so that you can decide where a change is required.
Before investing, it is wise to calculate the risk factor. You can do it by researching the market beta and Efficient market hypothesis. The risky investment should have a higher return, and for a secured investment, the return is not much.
Final thought: how much you could earn from stock
So now you have all the basic knowledge about the stock market and investing in it. Now a question may arise in your mind regarding how much you can earn from the stock market.
The answer varies with the return related to your investment sector and amount. The asset type or stock type also plays a huge role here. We suggest paying attention to geographical diversification besides all other facts.
Some financial advisors, such as Vanguard, recommend stocks with a growth rate of 40%. Moreover, we suggest checking on the terms and status of the brokerage before making a deposit.