Thursday, 1 October 2009

Stock Market Trading

Stock Market Trading for beginners ties in with the whole theme of this site which is to educate newcomers out there to the world of stocks and shares. When people want to learn how to trade on the stock market they generally think that you have to start looking at charts and stock tickers to find the hot stock. This only one part of buying stocks for beginners and it's certainly not a place I would recommend someone should start. It doesn't matter what reasons you have for wanting to get into the stock market whether it be to boost your retirement fund or just for the fun of it I don't believe anyone should just jump in blindly without doing a bit of research first. I've always thought that buying shares is a bit like gambling. You should never gamble what you can't afford to lose so don't be out re-mortgaging your house to buy whatever the hot stock of the week is. The idea behind Ben Graham's Security Analysis and the development of the value investment approach so successfully applied by Warren Buffett is that they take the gambling aspect completely out of the picture. Research is done so thoroughly that it's as close to a sure thing as you're ever likely to get.

If you are a beginner to stock market trading then you might feel swamped with information at this point. There is so much of it out there that you'll be left wondering where on earth you can start. You can buy online stock so easily and quickly now. The cost of buying stock has come down considerably too with all the competition out there from online stock traders. This should not be seen as a green light to go nuts and buy every penny stock in sight! I would always recommend using the value investing techniques described by Warren Buffett. He describes buying shares as being more like buying into a business. Try to look at buying stock as becoming a partner, albeit a very small partner, in a business. That way you may stop yourself from acting emotionally and dumping your stocks at the first sign of trouble.

Stock market trading for beginners is also very tough because of all the investing jargon used out there. I've covered the differences between bull and bear markets in a previous post so that may be a good place for you start. It's one of the simplest concepts to learn but I always feel that if you get the basics learned it will help you later on with the more difficult concepts. Your brain will have some hooks with with to cling on to when I start talking about price to earning ratio and its like! Websites like MarketWatch are good places to start. I've also found a lot of useful information on the Motley Fool website which also as a great forum with lots of people willing to chip in if you're stuck with understanding some stocks term. I would never take direct advice from someone in a forum regarding hot stocks. You never know why someone could be recommending stocks to you and if it was so great believe me they'd be buying it themselves rather than offering you up the chance to share in the spoils. I'd always recommend spending a good few weeks just reading over these sites and familiarising yourself with the jargon. Introduce yourself in the forum and get to know the users. The library is also a great place to go for more in depth information. Please check out Ben Graham's Security Analysis as a starter. Yes it is a bit of a slog but its the closest thing we investors have to a Bible!

To help you stock market trading beginners out he's a few basic terms explained. First up, what actually is a broker? You'll have heard it a hundred times already. A broker is short for a stockbroker and that is simply someone who carries out stock transactions. This is buying or selling stocks. You get all different types including full-service, online and auto-trade. They work for you to buy and sell your stocks. Dividends are something you'll be hopefully be seeing lots of! If a company you own stocks for makes a profit, shareholders are entitled to receive a bonus payment which is a percentage of this profit. You as the stockholder can choose to keep this money or reinvest it back into the company which will increase your percentage of stock. Futures can be a bit tricker to understand. Futures are purchased with the price of future commodities in mind. If the price of a commodity a future is purchased on increases in time, the investor will earn money. Alternatively, if the price of the commodity drops below what the investor originally paid the investor loses money. Confused? Don't worry about it the penny will drop eventually! Day Traders are people who I don't really understand but if they're making a killing on the stock market who am I to argue. Rather than keep stocks for the long term they buy and sell constantly with the aim of making small profit margins which all add up to big profits. This totally goes against the grain of Warren Buffett's value investing theory and mine too! Too much risk involved in day trading for my liking. Trading on margin involves buying stocks for a for a small fraction of the total cost of the share. The balance of the price is paid when the share is sold or on a subsequent date. Trading on margin could be compared to stock trading, it's very similar, with the exception that borrowed money is used rather than payment in full at the time of purchase.

These are a few basic terms which should help stock market trading beginners out there. They are obviously pretty simplified but hopefully I've made it easier to understand but still with enough detail that it's still useful. The stock market is a complex thing so don't get too frustrated if you can't grasp all the jargon right away. Also don't try and read everything out there as you might find all the concepts contradict each other! You've seen it all ready with day trading and value investing. It's far more important at this stage that you understand the basic terms and then you can dive in to the different investing approaches and decide which one is for you. You might find that a combination of two works! It's entirely up to you how you approach stock market trading!

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