Investing in stocks is a pillar of financial wellness that will set you on the path to becoming a millionaire. However, it can be tricky as the stock market is volatile and has its ups and downs.
If you’re thinking of getting into stock trading, here is what you need to know about it.
What Is the Stock Market?
The stock market is a public market where investors buy and sell shares. Bonds and treasuries are also traded in the stock market.
The government regulates the stock market. Even with its own rules, the stock market attracts investors from across the globe. They follow the performance of a share using indexes, which measures the weighted average value of a share on several securities.
What Are Stocks?
A stock is a unit of ownership of a company. When you poses a share, you are referred to as a shareholder or a stockholder. Stocks can either be public or private.
A public corporation is one that sells its stocks to the general public to trade in market exchanges.
The shareholders of these companies are members of the general public. Companies go public by listing on the stock market.
Private stocks are stocks that the general public doesn’t have access to. Private capitals are limited in number and are not traded publicly in any market exchange. Employees, managers, and directors own shares.
Types of Public Stocks
Shareholders in public corporations have the following types of public stock:
Ordinary shares are the most popular stocks around. It is the most basic way of owning a company. When you have common stock, you have an equivalent stake in the corporation, depending on how many shares you have.
When the company is profitable, shareholders receive cash dividends. You can also make money by selling the common stock when the market price goes up.
When you have common stock, you enjoy voting rights in the company. This means you get to elect directors of the board. One share equals one vote.
Preferred stock has a fixed dividend as long as you own it. This is different from ordinary shares, which have variable dividends depending on the company’s profitability.
When the company is liquidated, preferred stockholders are paid before common stockholders. Preferred stocks don’t have voting rights.
Classes of Stock
Corporations create different stock classes, so they can determine how much voting power each different class has. Class A stockholders have more say than Class B stockholders.
Benefits of Owning Stocks
- Claim on company assets.
- Earnings and capital gains
- Power to vote
- Limited liability
Basics of Investing in Stocks
You may have heard that the stock market is “manipulated” from a family member or a friend. This is not true; here are the basics of investing in stocks.
Risk Vs. Reward
Risk and reward are entwined in stock trading. All investments have a degree of risk in them. It is essential to understand that before you invest in stocks, you could lose some money. Let this not discourage you as the reward for taking the risk is a higher investment return.
For short term financial goals, invest in cash investments. Stock trading is ideal for long-term financial goals. If you invest carefully in stocks, you could make more money, albeit the higher risk involved.
Diversification is an investment strategy that involves spreading your money in different investments so that when one loses money, the other investments will make up for the cash losses. Portfolio diversification depends on how you spread money in your portfolio among different forms of investment.
A diversified portfolio should be diversified within and between different categories of assets. One way of diversifying your investments within an asset category is investing in different companies from various industry sectors. You can also expand your portfolio by owning mutual funds.
Asset allocation is an investment strategy that allows you to divide your investment portfolio between different types and classes of assets to minimize investment risks. Asset class categories include cash, fixed-income, and equities. Different asset classes have separate returns; thus, investors have a shield from losses in some asset classes.
Rebalancing is bringing your investment portfolio back to its original asset allocation mix. Rebalancing is necessary because, as time goes by, your investments need to align with your investment goals. Some investments grow faster than others; hence rebuilding is required to ensure the investment portfolio does not overemphasize one asset category.
Rebalancing is done by selling assets from over-weighted asset categories and using the money to invest in under-weighted asset categories.
How to Be a Millionaire With Your Stocks Investments
Keep the following tips if you want to be a millionaire from the stock market.
Use Index Funds
The index fund is a special type of mutual fund that tries to duplicate the performance of a financial index. Index investing simplifies investing and reduces your costs. Investing is done by measuring the performance of a large group of assets of a similar type, such as bonds and stocks.
When you invest in different companies in one fund, the investment in each fund is smaller. This means when one company is making losses, you don’t lose much money.
Budget For Investment
Add investment contributions to your monthly budget to be able to achieve your financial goals and track your investment. You should consider cutting back your spending to increase your investment amount.
Buy and Hold
Buying and holding a share refers to acquiring the ownership of a stock and holding on to it even when the share market is not performing well.
Investors want to buy low and sell high. This means you should seek undervalued assets and hold onto them for months or years.
Short selling is the opposite of buy and hold. When you short sell a share, you borrow the stock believing it will decrease in value before the expiry date. The point of borrowing the shares is to sell to willing buyers at the market price and purchase them back at a lower rate before the return date.
Short selling requires you to have extensive knowledge of the market and predict when the stock prices will go down.
Contribute Consistently to Your Portfolio
Contributing to your portfolio continuously over a long time is an excellent way of accumulating wealth in the stock market. If you don’t have a large amount to contribute at one moment, invest smaller amounts consistently over the years.
Make an Investment Plan
You should create an investment plan that you think will help you achieve your investment goals over the time you are investing in. The investment plan will prevent you from selling at the wrong time. Stick to the investment plan, not your opinion of what the future prices will be.
Invest For The Long-Term
When you hold stock for an extended period like ten years, you will be rewarded with higher rewards than keeping it for a short time.
Know What You’re Investing In
What you are investing in will determine how you invest. This is because the time horizons of investments are different. When you have shorter time horizons, invest conservatively. If you have an investment goal with a longer time horizon, you can choose a riskier investment.
Investing in the stock market will give you generous returns overtime. Now that you know all about stock trading, you can start investing in stocks with confidence and lett the stock market work for you.