What is the stock market? – How to Start Investing in the Stock Market for Beginners

Investment is important for everyone to ensure financial security. Stock market investments are great options for those who are looking for profits. However, stock market investments involve substantial risks and that is where knowledge of stock market investment comes in handy.

What is the stock market? How to start investing in stock market for beginners

Most people are familiar with the term “stock market,” but they may not be sure of its role in society.

The stock market is a large financial entity that in some way impacts everyone in a society, whether they have direct interaction with it or not.

While it can take years to fully understand all the components and implications of stock market activity, everyone should know the fundamentals and purpose of the stock market.

Let’s first understand the role of the stock market. 

The role of the stock market

The primary role of any stock market is to provide companies with access to large investor pools.

When a company chooses to “go public,” it sells ownership of the company to the public. In return for this sale, the company makes a considerable sum of money nearly overnight as investors buy “shares” in the corporate entity.

Selling shares on the open markets is often the only way to raise the significant amounts of capital necessary for large-scale manufacturing and the development of services that could affect millions of people.

Smaller companies with less capital cannot usually afford such a business model, so going public opens these doors. Even if you do not participate in the stock market, you likely drive a car or enjoy other products that were only possible through public capitalization.

Stock trading insights

Most investors would be well-advised to build a diversified portfolio of stocks or stock index funds and hold on to it through good times and bad.

But investors who like a little more actively engage in stock trading. Stock trading involves buying and selling stocks frequently in an attempt to time the market.

The goal of stock traders is to capitalise on short-term market events to sell stocks for a profit or buy stocks at a low. Some stock traders are day traders, which means they buy and sell several times throughout the day.

Others are simply active traders, placing a dozen or more trades per month. 

Investors who trade stocks do extensive research, often devoting hours a day to following the market.

They rely on technical stock analysis, using tools to chart a stock’s movements in an attempt to find trading opportunities and trends. Many online brokers offer stock trading information, including analyst reports, stock research, and charting tools.

What are the types of stock?

Stocks are of various types depending on parameters like ownership, market cap, dividend payment, risk, location, etc. 

Based on ownership rights:

• Common stock: The most basic type, granting voting rights (proportional to share ownership) and potential dividends (shares of profits). It represents direct ownership in the company.
• Preferred stock: Offers priority for dividends but usually no voting rights. It provides a more predictable income stream but less potential for capital appreciation.

Based on market cap:

• Large-cap: Stocks of established, well-known companies with market capitalizations exceeding $10 billion. They offer stability and moderate growth.
• Mid-cap: Companies with market caps between $2 billion and $10 billion. They can offer higher growth potential than large-caps but with more volatility.
• Small-cap: Companies with market caps below $2 billion. They carry higher risk but also potential for explosive growth.

Based on dividend payments:

• Growth stocks: Companies expected to grow faster than the average market, often sacrificing immediate profitability for future potential.
• Income stocks: Companies with a history of paying consistent dividends, prioritising current income over capital appreciation.

Based on risk:

• Blue-chip stock: Blue-chip stocks are shares of big, well-known companies with established histories of growth and profitability.
• Beta: Beta (β) quantifies the volatility or systematic risk of a security or portfolio in comparison to the broader market, typically represented by the S&P 500; stocks with betas above 1.0 are considered more volatile than the S&P 500.

Based on price trends:

• Cyclical: Stocks whose price tend to fluctuate with changes in the economic trends.
• Defensive: Stocks that fluctuate less with changes in economic conditions.

Now that you know the different types of stocks, you can invest in the stocks based on your investment needs.

Bull markets vs Bear markets

Navigating the stock market requires an understanding of bull and bear markets. 

A bull market signifies rising stock prices and investor confidence, indicating economic growth. Conversely, a bear market denotes falling stock prices, suggesting a potential economic downturn. 

The market has picked the bear as the true symbol of fear: A bear market means stock prices are falling — thresholds vary, but generally to the tune of 20% or more — across several of the indexes referenced earlier.

Bull markets are followed by bear markets, and vice versa, with both, often signalling the start of larger economic patterns. In other words, a bull market typically means investors are confident, which indicates economic growth.

A bear market shows investors are pulling back, indicating the economy may do so as well.

The good news is that the average bull market far outlasts the average bear market, which is why over the long term you can grow your money by investing in stocks.

The S&P 500, which holds around 500 of the largest stocks in the U.S., has historically returned an average of around 7% annually when you factor in reinvested dividends and adjust for inflation.

That means if you invested $1,000 30 years ago, you could have around $7,600 today.

How to invest in the stock market? – Tips for beginners

Entering the stock market can be exciting, but it’s crucial to take an informed approach. Here are some key tips for beginner investors:

1. Educate yourself:

Before diving in, take the time to understand the basics of how the stock market works. Familiarise yourself with key terms, such as stocks, bonds, and indices. Numerous online resources, books, and courses are available to help you build a foundational understanding.

2. Set a budget:

Decide how much you can realistically invest without impacting your essential expenses. Start small and increase gradually as you gain confidence.

3. Establish an emergency fund:

Prioritise building an emergency fund before venturing into the stock market. This fund should cover three to six months’ worth of living expenses, providing a financial safety net in unforeseen circumstances.

4. Diversify your portfolio:

Don’t put all your eggs in one basket. Diversification involves spreading your investments across different asset classes and industries. This strategy helps manage risk and balance potential returns.

5. Choose the right broker:

Select a reputable brokerage platform that aligns with your needs. Consider factors such as fees, user interface, research tools, and customer support. Many brokerages also offer educational resources for beginners.

6. Start with low-risk options:

Index funds, which track a broad market like the S&P 500, offer diversification and steady growth. Dividend-paying stocks can also provide regular income.

7. Invest for the long term:

Avoid chasing short-term trends or hoping for quick gains. The stock market fluctuates, but over time, historical data shows a general upward trend.

8. Monitor and rebalance:

Regularly review your portfolio to ensure it aligns with your goals. Rebalance by adjusting your investments if necessary. Market fluctuations may cause your asset allocation to shift over time.

9. Be patient and disciplined:

Don’t panic sell during market downturns. Stay invested according to your plan and focus on your long-term goals.

Different ways to invest in the stock market

Let’s now learn about the different ways to invest in the stock market. 

Individual stocks:

You can invest in individual stocks if you have the time and desire to thoroughly research and evaluate stocks on an ongoing basis. If this is the case, we 100% encourage you to do so. It is entirely possible for a smart and patient investor to beat the market over time. 

On the other hand, if things like quarterly earnings reports and moderate mathematical calculations don’t sound appealing, there’s absolutely nothing wrong with taking a more passive approach.

Index funds:

In addition to buying individual stocks, you can choose to invest in index funds, which track a stock index like the S&P 500. When it comes to actively vs. passively managed funds, we generally prefer the latter. 

Index funds typically have significantly lower costs and are virtually guaranteed to match the long-term performance of their underlying indexes. Over time, the S&P 500 has produced total returns of about 10% annualized, and performance like this can build substantial wealth over time.

Robo-advisors:

Finally, another option that has exploded in popularity in recent years is the Robo-advisor. A Robo-advisor is a brokerage that essentially invests your money on your behalf in a portfolio of index funds that is appropriate for your age, risk tolerance, and investing goals. 

Not only can a Robo-advisor select your investments, but many will optimise your tax efficiency and make changes over time automatically.

Conclusion

We hope this blog has empowered you to take control of your financial future. 

Investing can be both rewarding and challenging. By approaching it with a patient, informed, and diversified mindset, you can increase your chances of success and achieve your financial goals. So, take a deep breath, believe in yourself, and remember, the stock market is an adventure waiting to unfold. So, go forth, explore, and conquer the market!