Long-term investments are a great way to build wealth, and stocks remain one of the best long-term investments you can make. Stocks outperform most other investments in the long term, which is why those looking to invest for retirement or something significant in the future prefer them. Even though they are such a great option, they can still be confusing for beginners. We have put this guide together to tell you what you need to know about stock trading.
The terms stock and shares are interchangeable in many conversations, but they are not the same. To be a successful stock trader, you need to understand the difference between the two.
Stocks represent a slice of a company you can own through investing. You typically hold the stock of publicly traded companies. However, there are instances where you can hold stocks of private companies. These types of stocks are not traded on any stock exchange.
Shares are smaller denominations of a specific company’s stock. When you hear of stock trading, most people are talking about trading shares.
Companies will use their stocks to attract investments through their sale, and then use the shares offered to track the value of the company and its stock.
Stock trades are done through a broker. You tell them the stock you would like to buy or sell, and they execute the trades for you. You can also ask the broker to sell or buy a stock at a predetermined price to maximize your income — these are known as limit orders. They are just one of the many types of stock trades you can make.
Because they will be in charge of your money, you should be very diligent when choosing a stockbroker. Research their reputation, reviews, and commission fees so you know you are choosing the best stockbroker.
Also, check how easy to use their website or app is and whether it provides helpful tools such as additional resources for understanding stock trading.
Once you find a broker, you can start investing in stocks. It is important to understand that stock exchanges are not open on holidays, which is why you should know when the trading holidays are. The stock exchange will close early on these days and pick up on the next available day.
When trading socks, especially if you are investing, you should think about the different types of stocks available. The two main types of stock are common and preferred stocks.
Common stocks allow you to own shares in the company and also give you voting rights on most matters. Common stocks can earn a dividend, but their dividend is not guaranteed and can vary from one financial period to the next.
Preferred bonds pay a fixed dividend and the best thing about holding them is that their dividends are paid out before those of common stocks. Preferred stocks are a lot less volatile than common shares, which means their value does not go up or down significantly, but their dividends are typically higher than those of common stocks.
Because of how they are structured, preferred stocks are excellent for those looking for a regular income through dividend payments rather than growth through the increase in the stock’s value.
To be a successful stock trader, you need to know your risk tolerance. Risk is the chance you will lose money, and your tolerance is how much risk you are willing to take on. All stocks have different levels of risk, and you should only pick those that align with your risk tolerance.
Although there is a lot more that goes into stock trading, understanding the basics discussed above should help beginners get on their way to becoming successful stock traders. Also, keep learning to become a better stockbroker because there is so much to learn and know about it.