You cannot have talks on wealth creation without mention stocks and the stock market. Among other reasons, the stock market is one of the best ways for you to grow your wealth. On the list of the best passive source of income, the stock market is one of the best-recommended options, especially if you are patient with the market, smart about what to invest, and fully aware of the operations of the stock market.
So, if you are interested in investing, a financial process that involves laying out your money now to receive money in the future, as defined by the wealthiest man alive, Warren Buffet, you must understand how the stock market works. At the end of the day, your investment goal should be to put your money to work in one or more investment vehicles, with hopes of growing your money with time.
But how exactly do you invest in stocks? Which are the investment rules you must be aware of? Which is your best first stock investment?
With long-term financial success relying on your willingness to learn how to keep the odds in your favour as a way of managing potential risks, you must be knowledgeable about the stocks market. Recent volatility in the stock markets and the sharp shifts in the overall market outlook point to the importance of the right knowledge and bits of information for you to make the right investment decisions.
Unique studies of the financial markets and the ensuing financial cycles experienced from the 1880s prove that the only way for you to invest and earn from the stock market begins with a keen analysis of the state of the market.
So, while buying stocks like Apple (AAPL), Nvidia (NVDA), Facebook (FB) or Amazon.com (AMZN) feel like the best thing for you to do, you must confirm that today is the right time to buy the stock and if not, when will the right time be.
In this article, we’ll teach and all other stock market newbies how to invest in stocks. Everything from tracking the stock market, handing up-trends or downtrends, when to get in or out of the stock market, and even the significance of follow-through days will be discussed.
So, Let’s jump right into it!
What are stocks?
A stock share, also called equity or security, refers to the legal ownership in a specific company. Corporations often issue stock to raise funds, and the stocks sold are either common stocks or preferred stock.
Investors profit from stocks when the price of the stocks and the dividends increase. Therefore, the real money made in investing is made through the ownership and the subsequent holding of securities, benefits from the long-term rise in stock value, and the receipt of interests and dividends.
So, how do you invest in stock and build a portfolio?
Decide How You’d Like to Invest in Stocks
Before you invest in stocks, you must make up your mind on the investment approach you’d like to take on, because there is more than one approach to investing in stocks.
There are two main ways you could invest in stocks – DIY or the investment manager way.
The DIY way works best for the DIY types of individuals interested in choosing their preferred stocks and the funding the stocks all by themselves. This is often the riskier investment approach in that if you don’t understand the markets well, you might make very expensive mistakes. So, you need to go to class first, take in all you need to know about the investment, understand how much risk you can manage, and find the best online stock broker to work with.
But, if you are on the other side of the fence where you believe that investments in stock are great investments, but you need someone to manage the investments, then your biggest decision will be deciding who to work with. You’d start with a Robo-adviser, which is the service that offers high-quality but low-cost investment management. The best news about this investment approach is that virtually all the leading brokerage firms offer the investment management options leaving you with one task – naming your investment goals.
Determine the best stocks for you to buy
Before you invest, you must know who the big winners are. In this case, you must research and identify the biggest performers in the stock market. To simplify your search, you should find the stocks with explosive earnings, strong equity returns, sales growth, and also stocks for the fast-growing or industry-leading products and services. Don’t forget that the best-performing stocks are managed by the best mutual fund managers.
You also need to take into account the relative strength of the stock market; which is to say that when you are analysing the stock market in a downturn or when the market is volatile, then you should be looking at the stocks whose RS line is either at or close to the 52-Week high. Remember that this is the sign of market leadership in a bullish market.
For more information about the best stocks to buy, check the top-performing stocks listed in Section Leaders, IBD 50, IPO Leaders, and other financial publications.
Here is a list of the metrics you should use before you buy stocks:
Current market outlook – market in correction, confirmed uptrend, or uptrend under pressure.
Company fundamentals plus institutional demands – You need to check the composite rating, EPS rating (last quarter and last three quarters), EPS acceleration quarters, return on equity, sale growth in the last quarter, industry group, whether the company is among the top-rated stocks, accumulation rating, current share price, relative strength rating, and average daily volume, etc.
Chart analysis – the type of base formed, the buy point, % volume spike on the breakout day, and relative strength. To be on the safest side, consider buying stocks when they break out of the sound chart patterns in a very high volume.
Below are three of the most important investing tips you should live by when investing in stocks:
Always check the current market trends that pose with a big picture and also a market pulse. Basically, beware of the current market status to determine whether the time is ripe for you to buy stocks or to protect your profits by playing defence.
Look out for the best stocks by listening to commentaries and checking the top-performer lists. You might also want to find the top-performing stocks right before their breakout time.
Evaluate your current stocks and then plan out your trades.
Best Time to Sell Stocks
Investing in the stock market is all about knowing when to buy or when to sell stocks. As you learn everything you need to know about buying stocks, you also need to pay attention to the best times or the signs that it is a good time to sell your stocks. You also need to know how much you can sell to avoid taking bigger losses.
When it comes to selling stocks, there are two rules you must be aware of – the offensive rules employed to lock in your profits and the Defensive rules that will cut short all losses.
Offensive selling is recommended when the stocks rise to between 20 and 25% above the proper buy point, and this is when you should take out most of your profits. You could also use this rule to ensure the compounding of the smaller gains into bigger returns, overall.
With Defensive selling, all you are doing is cutting short your losses, to protect the remainder of your profits. For this to happen, you need to watch the general market and your specific stocks. In the general market, you must take the defensive selling option when the market pulse’s outlook is on the up-trend, under pressure, or in the event of ‘Market in Correction.’
Regarding your specific stock, defensive selling is recommended when the stock drops 7-8% below the stocks’ purchase price. Chart analysis is also an important indicator. By looking at the charts, you should sell your stocks if there is a huge, single-day decline in prices since the beginning of the stock’s run in its heaviest’ volume recorded in months. Also, sell if there is a sharp drop in prices and also a sharp close below the 10-week period after heavy volume movements.
Understanding these two rules ensures that you not only make, you also get to keep and to compound your profits on the stock market.
Can You Read the Stock Charts?
In addition to understanding the best stocks to buy, when to buy, and when to sell your stocks, you also need to understand the financial investment graphs that you see all over the stock markets.
The good news is that reading the stock charts doesn’t have to be as intimidating as it feels now.
The truth is that the stock charts tell a story. So, while we might not be as great stock pickers as Warren Buffet, we can read charts to determine where to buy and how much to sell. These charts tell us everything from the earnings reports, analysts’ commentary, and drug trials reports to major mergers and acquisitions; and whether or not you are making the right investment choice. For example, before buying stocks, you need to check if the stock is trending higher or not. In other words, the charts tell you if a stock is worth your money or not.
Some of the things that the charts tell you to include:
Market direction – generally, if the charts show a confirmed uptrend, then that means that you have the green light to buy that stock. However, when the market outlook shows an uptrend under pressure status or a market in correction state, then you should wait.
Chart Action – Like launchpads, the chart bases reignite stocks, lifting them higher, even after resting. So, to lower risk and enjoy the potential upside of the market, wait for stocks to form and to break out the chart pattern. Keep in mind that you will buy the best socks if you look at all the other technical matters that affect the stock markets.
Company Fundamentals – often, the biggest winners in the stock market are the most innovative, industry leaders driven by sales growth and exceptional earnings. So, look out for such listed companies.
Next, you need to understand the meaning of different chart patterns, such as:
Cup with handle – regarded as one an indicator of a winning stock. But before you rush into action, check the prior uptrend, the base depth, base length, handle duration, buy point, and the buy range. Resistance and support are also important.
Double Bottom – often, this sign shows that the market is choppy, volatile, and exhibiting a roller-coaster behaviour. Even so, it means great potential for big price gains.
Flat Base – This pattern depicts a great opportunity for you to add new shares to the existing stock or for you could start a new position.
Don’t forget to analyse the daily and weekly charts.
Open Your Investment Account
The information above will guide you as you start your investment journey, but all that is theoretical. You start the real journey when you create your investment account.
Going back to the types of investors, it means that if you are a DIY stock investor, you’d need a brokerage account. With a brokerage account, you can open an IRA account. However, you must evaluate the brokers you will be working with – check their cost of services and applicable fees, investment selections, as well as the investor research and the research tools used.
But if you are getting help, you’d want to open an account with your Robo-adviser. With this investment, you get all the benefits of investing in stocks, but you don’t have to do the legwork of picking out individual investments. Since the Robo-adviser does all the work, you only pay the management fees.
Note that while your 401(k) account means that you’re already investing, it doesn’t mean not creating an investment account. You don’t get to trade in individual stocks under your 401(k) account.
Differentiate Investment Instruments
For starters, know the difference between stocks and the stocks mutual funds.
The stock mutual funds, also called exchange-traded funds, refer to the mutual funds that allow you to purchase small portions of different stocks, all in one transaction. Therefore, the Index Funds and the EFTs work more like the mutual funds used to track the index. The stock mutual funds are inherently diversified, reducing investment risks.
Individual stocks, on the other hand, are the listed stock options specific to one company, and you can buy one share or a few shares (stocks). Note, however, that building a diversified portfolio out of different stocks requires a significant amount of investment.
How much do you have to invest?
Essentially, your budget determines how much you are going to invest. You don’t need big money to invest in stocks. Contrary to conventional wisdom, your pockets don’t have to be super-deep for you to invest in stocks. To get started, however, we recommend putting in something as little as £500 or £1000, then add to your investment pot as you earn and save.
To make the most out of your small budget, you need to invest when the market is in a confirmed uptrend rather than when the market’s under pressure.
Remember that the amount of money you are going to invest will also be dependent on the cost of an individual stock or how expensive the stocks are.
And if you choose to invest through funds, then your goal will matter in terms of how far in the horizon you want to keep investing.
Avoid the high-volatility stocks unless you understand the complexities of investing
Only invest in the stocks of businesses you understand
Now that you know all you must know before you begin your investment journey, it’s time to get to work. But don’t forget that the investment journey has numerous intricate approaches and strategies you should be aware of. Also, you must learn about investing in the stock market continuously.