Just a few decades ago, only Wall Street traders (or shady stock brokers) had the privilege to be a part of the stock market. Nowadays, anyone can become a stock trader.
The introduction of online trading rose to popularity quickly, and this practice became affordable and easily available to most people. Before the emergence of online stock exchanges and discount brokers, people had to hire a regular brokerage firm to manage stocks on their behalf. Needless to say, these firms worked for very high commissions. Now that everyone can buy or sell stocks, small-time traders should be concerned about improving their trading skills.
How Does the Stock Market Work?
Stock prices go up and down for a variety of reasons. In theory, this occurs when the company’s business is improving or declining. This also has to do with overall market trends, and a number of other reasons that are hard to predict. Like any other market, the stock market operates on the basis of supply and demand. When a surplus amount of people buy certain company stocks, their prices start to instantly increase. This tactic is used by various dishonest traders who are artificially creating hypes around certain company stocks, so they can sell their share at a higher price. These practices are called pump-and-dump schemes, and are the number one threat for rookie traders.
Where to Buy Stocks?
Small-time investors usually buy and sell stocks through brokers. There are several different kinds of brokerage firms. The old-fashioned firms deal with their clients face-to-face only, provide some additional services (like investment advice), and charge a much higher commission. These firms are also called full-service brokerages. There are also discount brokerages that only do business online, and provide no investment advice. They work at reduced commissions, and their services are considerably less expensive than full-service brokerage firms.
How to Choose a Stock?
There are two ways to choose the right stock to buy.
One way is to choose stocks after an elaborate fundamentals analysis. This type of analysis checks a company’s financial reports/ public statements for the purpose of analyzing the health of that company. These analyses should include as much data as possible.
Technical analysis is another way of choosing the right stock. Traders who use these analyses believe that price trends of stocks follow certain patterns, and that traders can choose stocks by reviewing past price swings to predict future price trends.
This way of choosing is much more controversial than fundamentals analysis. Using the second method alone is not advisable, because it turns trading into gambling. The best advice would be to use the first method, or both methods combined.
Different Types of Stocks
Large-Cap Stocks
These stocks are from big companies that don’t have big growth potential. Fortunately, large-cap stocks have the best price stability, and come with the least amount of risk. Some of the stock categories that can be classified as large cap stocks are:
Blue Chips are the stocks of large, stable companies with high profits.
Income Stocks provide lots of dividend.
Defensive Stocks come from companies that are resistant to economic and market cycles.
Cyclical Stocks are very dependable of the economic and market cycles.
Mid-Cap Stocks
These stocks are from companies that are smaller than the large-cap groups. They consist of the same categories as the large-cap groups, but among the mid-cap stocks we can find baby blue chip stocks. Baby blue chips are stocks from profitable and debt free businesses that are smaller size than the companies listed in the regular blue chip category.
Small-Cap and Micro-Cap Stocks
These are mostly speculative stocks that come from small companies that tend to grow in the near future. Stocks of tech start-ups are usually sold in this category.
Penny Stocks
These stocks are not listed at the major exchanges, and are sold over-the-counter at institutions like OTC bulletin boards. Their prices change fast, so it requires active trading. Investing money in these stocks is more risky. The SEC considers the penny stock market to be the most volatile investing environment. On the other hand, penny stocks can bring in very high returns. Many smart investors become millionaires by trading these stocks. They provide more profit-taking opportunities, and higher gain margins than large and mid-cap stocks.