Beginner's Guide to Stocks
I've compiled a ton of notes lately from my research on stocks and other types of investment's that many people have expressed interest in learning. I realized that a lot of the sources I was using to learn were locked behind paywalls- nice right? Let's make the people pay to learn how to use their own money to make more money. Anyway since I hate that business model (and since all of this information is free to the public online anyway) I'm making a beginner's guide using my own personal notes. Here is a simplified list of terms and explanations to help you get more familiar with the stock market and trading.
1. What is a Stock?
A stock is essentially a small portion of a company.
Investors buy stocks hoping their value will grow over time.
2. Bid and Ask Prices
Bid Price: Highest price buyers are willing to pay for a specific stock.
Ask Price: Lowest price sellers are willing to accept for that stock. The ask price is ALWAYS greater than or equal to the bid price.
Spread: Difference between bid and ask prices (Ask-Bid=Spread). The spread goes directly to the market maker (person in charge of pairing buy and sell orders).
Larger spreads can indicate low liquidity or high volatility.
3. Types of Orders
Market Order: Immediate buy/sell at the best available price.
This is probably the default option on any stock trading app that you use.
Limit Order: Buy/sell at a specific price or better.
The price you set is known as the Limit Price. Your limit price is the highest you are willing to buy a stock for and the lowest you are willing to sell a stock for. Orders will only be fulfilled within those parameters, giving you precise control.
Stop Order: Triggers a market order when a stock hits a specified price.
This means that although you are setting a specific price for your order to be executed at like a Limit Order, the finale value has the potential to change just as a Market Order would.
4. Stock Splits
Companies increase the number of shares at lower prices to make them more affordable.
Example: A 2-for-1 split turns one $100 share into two $50 shares.
5. Order Execution
Accepted: Broker acknowledges but hasn't placed the order.
Open: Order is active but not matched.
Partially Filled: Some shares matched at your price.
Filled: Entire order executed.
Canceled: Withdrawn before filled.
6. Investing Basics
Stocks historically grow about 10% annually.
Only invest money you can afford to lose, you don't want to invest anything that you're going to need in the near future and you want to make sure it's not an amount that you're going to miss if the market ends up going down. Always have additional savings/investment options.
Even if you can only commit to $5 a week, at least it's something. We all have to start somewhere, it just takes time.
7. Dividends
Payments from company profits to shareholders.
Can be in cash or additional shares.
You must own stock by ex-date to receive the next dividend. The ex-date is usually one business day before the record date (when a company establishes it's list of shareholders who will receive the next payout)
8. ETFs (Exchange-Traded Funds)
Bundles of stocks offering diversified investments with a single purchase.
Types include index ETFs, sector ETFs, and commodity ETFs.
(These are my personal favorite thing to invest in since it bundles a bunch of companies into one, making the risk minimal. I invest in QQQ, VOO, and SPY)
9. Market Exchanges and Hours
The 3 major stock exchanges in the world are the NYSE(New York), NASDAQ, and LSE(London).
Trading hours are typically 9:30am-4pm EST, with extended pre-market and after-hours trading.
10. Market Trends
Bull Market: Rising stock prices over time.
Bear Market: Falling stock prices over time.
11. Initial Public Offering (IPO)
Company's first-time sale of stock to the public.
SEC oversees approval.
Investing in IPOs can be risky but offers early investment opportunities.
(I was able to snag one share of Reddit at IPO and a couple more shortly after and my current return easily sits at over $40 in less than 3 months)
12. Investment Tools
Rule of 72: Estimates how long it takes to double investment based on annual growth rate.
To determine this we use 72 ÷ the annual rate of return (how much a stock grows yearly). So if you invest in a stock with a 5% rate of return
72÷5=14.4. That's about 14 and half years for your money to double.
Dollar Cost Averaging (DCA): Investing fixed amounts regularly to reduce risk.
Instead of investing $100 all at once, you might set up a weekly buy for $10 over the span of 10 weeks.This allows you to buy $100 worth of stock at a more average price.
The stock market has grown roughly an average of 10% per year in the last 30 years making it one of the best methods of building wealth long-term.
