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The basics of investing in the stock market

  • October 23, 2020
  • Drew Ragosta

For new investors, the stock market and all of its complications can seem befuddling and even unclear at first. So far in this blog, we’ve explored the fundamental terms of the stock market, but we haven’t discussed how the market works from a technical point of view. Below we dive into the fundamentals of understanding how investors make money in the market and the technicalities of buying and selling stocks.

How do people make money in the market?

As you know, a stock is fractional ownership of a company. Investors can, within reason, buy as much stock in a company as they please for a set price. That set price appears under the stocks “ticker” and is constantly changing. Stock prices fluctuate at a rapid pace and to make money on a stock, the current price under the ticker has to be more than what you initially bought it at. When investors sell their shares, they make money on the difference between what they initially paid for it, and what they sold it at per share.

At some point I’m sure you’ve heard the saying “buy low, sell high.” This is golden rule to remember when you start investing in the stock market.

But what about dividends?

Some stocks will pay dividends. Dividends are a distribution of profits by a company to its shareholders. Companies will typically dole out dividends when there was a large profit made or a surplus to keep investors interested in their ownership. Typically, bluechip stocks will pay dividends to give investors more incentive to keep their money in those stocks.

How do I start trading stocks?

Buying and selling stocks isn’t as simple as just going to a store where they distribute them by the masses. Investors have to go through a brokerage company like Robinhood or Charles Schwab to make an account. From there, you can put as much money as you please into the account and allocate it towards the stock picks of your choice. Unlike Schwab and Robinhood, some brokerage accounts are not free to use and will charge a fee per trade. Consult a professional to determine what type of brokerage account is best for you.

Active vs. passive investing.

As an investor, you will naturally develop your own strategy. There are generally two schools of thought when it comes to investing: passive and active. Active investing requires a hands-on approach and watching the market closely on a daily basis. Generally, an active investor will buy and sell stocks far more frequently than a passive investor. Passive investing typically involves far less trading and investing in index funds or mutual funds.

Diversifying your portfolio.

As you start to invest more, you’ll most likely hear out someone’s argument for a diverse portfolio. Diversification is the belief that an investor should own a wide array of different stocks and investments instead of investing in only one area. Diversifying your portfolio helps investors mitigate risk and yield higher returns on a consistent basis. The basic school of that is that if you own stocks in a wide array of different industries, it will help you better manage fluctuations in the market.

Bull markets and bear markets.

Have you ever heard the term “bullish?” Similar to the disposition of the animal, a bull market is when investors are confident and are indicative of a growing economy. You can look at a bull market as a stampede of eager traders running towards the floor. Bull markets usually precede a bear market. A bear market is the opposite of a bull market and typically indicates that traders are hesitant or afraid to put money in the market.

There are plenty of more complicated concepts and terms to learn as you continue to grow as an investor. New investors should always seek the advice and consultation of a professional before placing any trades. Those who used Front over the last six months saw an impressive 55.39% average growth on their portfolios. You can too. Please visit www.front.org or follow us on social media to learn more about how Front can make you a better investor.

 

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