Stock trading – Beginner-Friendly Guide For Starters

Are you inspired by your friends who are doing well in the stock trading market? Do you want to start learning about investing because you feel you have zero knowledge of stocks? Here is everything you need to get started. 

Why Learning About Stock Trading Is Necessary?

Many people think they are ready to take their first step into the stock market, but they might be afraid to do it. Knowing what stocks to invest in as a beginner is crucial along with what practices to steer away from. Also, it is crucial to pick the right companies to invest with specifically. 

First off, Assess Your Financial Goals

It is crucial that you first determine why it is that you want to invest in stocks. For example, is it because you want some retirement resources or maybe you want to invest in some corpus. It can be something like buying a home, a kid’s college fund, or simply wanting to save for the rainy day. 

When you plan to invest money in the stock exchange, financial gurus say that you will be optimally locking that fund for a period of, say 5 years at the least. The longer, the better!

Invest Only What You Can Afford to Loose

Investing in the stock exchange is not immune from risks. This is particularly true about short-term stock investments, say for three years or less. The market fluctuates heavily over short periods, so it is extremely important that you use surplus money to invest and appreciate the risks that come with it. In addition, you are mentally prepared to tolerate losses in case there are. 

Setting up Your Brokerage Account

The best way to learn about investing in the stock market is to go online. There are hundreds of online brokers on the internet today. You must compare the features of the best online brokers and determine which one works for you. 

Keep Your Eyes and Ears Open

It is a good idea to ask other online investors about the best online platform. Read up on reviews and testimonials before setting up an account. Once you decide on the trading platform, you will be asked to open a brokerage account. 

Some platforms have mind-blowing good research materials and educational tools to learn how and where to invest. However, online stock trading is not completely free. Some platforms charge a fee or commission for facilitating your trading account. Therefore, it will be crucial on your part to do complete research on pricing so that there are no surprises later on. 

How to Determine Whether a Stock Is a Good Investment

One of the thumb rules in stock investment is to identify good business prospects in the long run. That is more important than identifying stocks that are cheap in value. Stocks that perform very well, in the long run, are worth every dollar that you pay for them. Using your money to buy cheap stocks often backfires because they never do phenomenally well in the market resulting in dead investment. 

Important Metrics for New Investments

Identifying good business may take a little time for you to get the hang of it. The best approach is to not rush into it. 

• • • The P/E ratio or the price is to earning ratio.

This is the most widely cited metric. The ratio is arrived at by dividing the desired company’s current share price by its last year’s earnings. There are other ways of calculating this ratio, but this is the most followed.

• • • The PEG ratio or the price to earnings growth ratio.

It involves dividing the P/E ratio of the company in question by its projected rate of growth. For instance, say the company’s P/E ratio is 35, and the expected growth is pegged at 12, then the PEG ratio will be 2.9 or close to 3.0.

• • • The pay-out ratio.

The pay-out ratio is always measured as a percentage. It is the clearest indication of the company’s dividend stability. The easiest way to explain this is with the help of an example. Say the company paid a dividend of one pound on all its shares. If it has earned 4 pounds, then the payout ratio is 25%. 

Learning about the investment metrics is a good practice, especially for newbies. They help you not only in finding valuable stocks but also are useful for idendifying faster-growing companies. 

Things That New Stock Investors Must Steer Away From

Use a notepad to chalk out your investment plans before you set your foot into the field. This will help you think over your decision a couple of times. Sleepover them if needed but never make get emotional when investing in shares and stocks.

This is a bit of prudent advice because impulsive investments in stocks can sometimes cost you a lot of money. In addition, it can make your portfolio look poor and even land you into insolvency. 

Here are the stocks that you may treat with caution

• • • Companies that are way too growing rapidly. If a company is very growing quickly, steer away. Markets can be very volatile, and it is better to wait than to be sorry. Wait to create a strong base in terms of knowledge and portfolio before you get influenced by ‘the next big thing waiting to happen’ kind of company. 
    • Penny stocks are stocks that have very small market value or those that do not trade on major global exchanges. This advice is good for seasoned investors as well as those that are just entering. 
    • IPO or Initial Public Offerings are shares of companies that are becoming public. Newer companies have all the trappings of a volatile market, and the risk is too much for a beginner to absorb.
    • Shares of companies that you have no idea about must be avoided at all times by all investors, beginner or not. The rule to follow is that if you cannot comprehend clearly what business the company is into, you don’t invest.

The final advice

Entering the stock trading market is mostly about your goals in the long run. That is why you must always maintain a long-term investment mentality to realise your investment goals in life. Do not resort to panic selling if the shares slide down. Instead, think of how to calibrate and think logically about the situation using all resources available.