Investing in Stocks for Beginners
Investing in Stocks for Beginners
Living on investment income is the epitome of true financial freedom. Investments can be understood as an investment of money or other valuable resources in anything with the expectation of multiplying funds in the future.
And now, it is time to put your money saved to good use. But what should you choose?
Opening a deposit in a bank for the sake of living on interest – too small a profit, given inflation, you can not even notice it. Starting a business from scratch in a new field is an immeasurable risk these days. So where is the intermediate option of investing, so that one can theoretically expect a good profit, knowing that tomorrow you will not instantly lose everything? It’s investing in stocks.
Investing in stocks: who is it good for?
A stock is a security that gives its owner the right to claim a share of ownership and receive a portion of the company’s profits.
From an investor’s perspective, a stock is an asset that is bought either with the expectation of making a profit from its subsequent sale or the dividends paid by the stock company.
Compared to bonds, stocks are a risky asset because there is the possibility of a decline in the value of the stock and, consequently, a decline in your investment capital. At the same time, the higher risk usually provides the investor with a greater potential return.
1. Receiving dividends
By buying shares, a person becomes a claimant for a portion of the profits. How much of the profits will be paid to shareholders as dividends are approved at a general meeting of shareholders.
The share price, like the dividend rate, is a variable metric. Dividends are distributed on a schedule, such as once a quarter or once a year, and forecasts and schedules are made for several years. Large companies try to maintain dividend growth every year, which fuels demand the company’s securities among investors.
Among U.S. companies, there are a decent number of dividend aristocrats – companies that pay dividends uninterruptedly for decades, while increasing the dividend rate every year.
As a rule, the value of shares of dividend companies does not grow at considerable rates, because almost all profits are used to pay out dividends to shareholders, not for business development. This situation is typical of already established businesses, which have long ago reached their peak.
2. Trading in shares
A different approach to making money on stocks is based on the ability to speculate on stock prices and is essentially trading rather than investing. Stock prices fluctuate constantly, they can rise and fall in a fairly short period, providing significant volatility even within a few minutes.
Many factors can affect the price of a stock:
- The global economic environment.
Major disasters, major political events, world crises, and other major economic changes;
- Foreign economic events.
Sanctions, trade wars, and trade bans affect the shares of a country’s major companies;
- Fluctuations in the refinancing rate of the Central Bank, changes in tax legislation.
Have a direct impact on the cost of loans for business and generally affect the business climate in the country;
- Seasonal market fluctuations.
For example, the traditional pre-New Year’s rise in prices;
- Official statements of financial experts.
The world of exchange trading has authorities who can influence quotations by their words and actions;
- Trade operations on the part of big players.
When the “sharks”, who have a large number of shares of a large company or corporation, decide to buy more of them or sell a large amount of them, a large price swing occurs;
- Media publications.
Politicians and businessmen with a lot of influence can significantly affect stock prices with just one phrase in a tweet.
Probably the exact number of such factors is incalculable. All these statements from the media along the lines of “Elon Musk smoked marijuana live, Tesla’s stock price is down 8%” and other ridiculous correlations.
It follows that these fluctuations can be detected, predicted, and profited from, which is exactly what professional traders do. They are constantly monitoring the news, quotations, significant events on the market. Choose the right time to buy and wait for the right circumstances to sell assets.
Stock volatility, i.e., price volatility, plays a key role in the ability to generate income from trading. If a stock has made significant jumps up or down in its value, it is customary to say that its volatility is high. If the quotation history chart is more even, without ups and downs, the volatility is low.
No one can predict exactly how much a company’s securities will be worth. But professional traders have a whole set of analytical instruments, the experience from hundreds or thousands of deals, the ability to read complex charts of quotations movement on the fly, based on which they can make their forecasts.
Unfortunately, traders can not provide a stable income in the long term and often lose their money. MoneyKeeper does not recommend you to speculate on the stock market until you have professional knowledge and fully understand all the risks.
Who is suitable for investing in stocks?
- Stress-tolerant investors who are willing to study a lot of charts and see the fall and rise of quotes;
- People with a financial cushion. They are looking for alternative sources of income other than their main source. Such people can allocate part of their financial cushion to this case by buying stocks or using the services of a broker;
- Risk-takers looking for a way to make super profits from a small capital. This is very unreliable and dangerous, but with various extreme trading strategies, the possibility of such an outcome is permanently present. Moreover, unlike the casinos, slot machines, MLM projects, pyramid schemes, and other methods of fraud, here you can feel the pulse of events and see all the processes, cause-and-effect relations, in general, control the situation;
- Disciplined people, familiar with the basics of financial literacy. They have already calculated what part of their family budget or investment portfolio should go to short-term or long-term investments.
Pros and cons of investing in stocks
Let’s list the pros of investing in stocks:
- Good potential for profitability, which will provide you with the choice of the right strategy and competent analysis of the situation;
- Liquidity of shares. With the development of Internet trading platforms and other online tools, you can perform the necessary actions from anywhere, just having at hand a smartphone with Internet access;
- Small initial capital. You can begin trade with any amount, but it is better to begin at least with tens of thousands of rubles (for good profitability);
- Opportunity to participate in the company’s work if you buy a large block of shares. When you are a major investor, your decisions will influence the company’s policies;
- You can use the investment tools yourself, or communicate with brokers who will manage your deposit, leaving you only to make major trading decisions;
- Shares of the largest companies are a long-term investment tool and the least risky in comparison with smaller companies.
Now here are the main disadvantages:
- The price of a stock can rise suddenly and fall just as sharply. Especially, if you have chosen not to invest in “blue chips”, but issuers with high volatility. An inexperienced investor can allow his or her financial portfolio to suffer serious drawdowns during such events;
- Influence of extraneous factors. Major geopolitical changes, crises, sanctions, a global pandemic, and other major events can easily bring down plans and strategies. There is no way to influence this;
- The lack of real physical value of securities. If gold is gold, then stocks are something that has no absolute value; they are tied only to the business and sphere on which they are dependent. For example, the stocks of the major telegraph companies, with the proliferation of other means of communication, are as worthless to anyone as those companies themselves. You can’t bury stocks in a stash for 10-20 years with the expectation that they will be worth anything at all by then;
This is especially true in the high-tech sector, where things are changing rapidly. A prime example is the search engines of the ’90s and ’00s.
Google is now an absolute monopoly, but once it was little noticeable against Neteller, AltaVista, Ask. Their stock was worth much more than Google’s assets. But the latter is now a multi-billion dollar corporation, and the shares of the former leaders have fallen hundreds of times.
Active stock trading requires strong nerves. This is also a disadvantage because when you take the speculative part into your own hands, you have to constantly think about quotes and follow the news. Even professionals admit that trading on the securities market is an exhausting occupation.
Investing in stocks is a good tool to increase your capital with the preservation of liquidity and prospects for the future. There are disadvantages, but careful study of all processes, skills to calculate rate fluctuations, and portfolio diversification will help reduce the risk of losing your funds.