Warren Buffet, George Soros, Carl Icahn, and Benjamin Graham are famous billionaires that every person aspires to be. Their net worth and their humongous fortune is always the point of captivation for many people. You can find a lot of books and blogs filled with admiration.
Now one wonders what contributed to their colossal wealth. How the Richie-rich became kings of the market?
If I were to quote that these Billionaires are intelligent investors, and stock trading is their tool of generating an abundance of worth.
It will be hard to believe such an assumption to be valid. But it is reality; stock Investing has enabled them to be billionaires.
You can ascertain through googling the potential of stock investing in wealth creation.
That’s why I am creating this guide, which will help anyone who wishes to jumpstart their stock-market investing journey but do not have a clue to do precisely that. Therefore, read this article thoroughly.
What is the stock?
Stocks are investments representing fractional ownership of a corporation in proportion to the total number of shares owned by a shareholder.
It entitles a fraction of the company’s financial gains, part of assets at the time of liquidation in corporate affairs.
Stocks are also known as shares and equity. The stocks are issued by the companies to raise capital, and stock prices fluctuate based on the company’s performance.
The stocks can be bought and sold either privately or on a stock exchange.
Shareholders buy their stocks in the form of Initial public offerings (IPO), and they get a dividend. It is a cash disbursement in favour of buying the company’s stock.
Type of stocks
The Stocks can be classified as follows :
Based on ownership
- Common Stock – The holders of common stock have voting rights and can elect the board of directors in a company. Common stock is a form of part company ownership. After paying creditors, bondholders, and preferred stockholders, common stockholders receive leftover assets.
- Preferred stock – Preferred stockholders get no or limited voting rights in the company. They have a higher claim on distributions such as dividends. They can also claim higher on assets than common stockholders in case of liquidation.
- Hybrid Stock – Hybrid stocks are those preferred stocks that can be converted into common stocks at a certain point in time with some terms and conditions. Hybris stocks are also known as Convertible Preferred shares.
Based on Market capitalization
- Large Cap Stocks – Large-cap stocks are the shares of those companies that have a market capitalization of more than $5 billion. These stocks usually belong to Blue- chip companies.
- Mid Cap Stocks – Mid-cap stocks are the shares of public companies that have a market capitalization that can be between $1 Billion to $5 billion. These stocks are similar to stock of blue-chip companies in terms of growth and size.
- Small-Cap Stocks – Small-cap stocks are the shares of companies that have a market capitalization of $300 million to $2 billion. These stocks belong to small businesses.
Based on Risk
- Beta Stocks – Beta stocks can be negative or positive, which is determined by the movement with the market or against the market. Derive Beta Stocks by calculating the price volatility of the capital.
- Blue Chip Stocks – Blue-chip stocks are the stocks that belong to companies that have stable earnings, lower liabilities, and have regular dividend payout capabilities.
Based on Price Trends
- Defensive Stocks – The Stocks of Food and beverage companies are typical examples of defensive stocks. Weak market and economic conditions do not perturb these stocks.
- Cyclical Stocks – Cyclical stocks are greatly affected by economic conditions and see high price fluctuations. It means if there is a steep rise in financial terms, the price of the stock will increase, and if there is a slowdown, the amount of the stock will fall.
What is Stock Investing?
Stock trading or Stock investing is the process of frequent buying and selling of shares or stocks to capitalize on the fluctuation in the daily price of commodities. One who trades stock is known as Stock traders. These stock traders are market participants who buy and sell stock on behalf of individuals or business companies.
Categorising stock trading in two forms :
- Active trading which involves buying and selling shares within a day.
- Day Trading, which is concerned with buying and selling stocks within a single trading day.
How Does Stock Investing works?
Two methods can do stock trading:
You need to visit Local stock exchange, where you inform a broker you wish to sell or buy a stock. The broker sends his clerk to a Trader who agrees on a particular price to purchase and sell your owned stock.
You need to make an account on an online brokerage platform to Sell and buy stocks that you own of a company. For example, Sharekhan, Ameritrade, Groww, 5Paisa, and Extrade, etc.
What is a Stock exchange?
The stock exchange is a corporate body where stockbrokers or stock traders can buy and sell shares of stock, bonds, and other financial instruments. A stock exchange facilitates investors to buy and sell shares of a company among each other in an organized and legitimate manner.
Step by step Process of Trading in Stocks
Here I will lay out a Process that will enable you to learn How to start stock investing. These are the necessary steps you need to take in the Process of stock trading. The steps are as follow :
Get Educated Regarding Stock Trading
If you wish to start stock Investing, then you must gain a complete insight into the world of stock trading. You need to be aware of all norms, terms and conditions, Metrics, Analysis Techniques, and Risk involved with stock trading. You can also refer to books, videos, and Blogs to learn stock trading.
For starters one can refer to these books listed below :
- The Intelligent Investor and Security Analysis by Benjamin Graham
- The Interpretation of Financial Statements by Benjamin Graham and Spencer B. Meredith.
- Expectations Investing, by Alfred Rappaport, Michael J. Mauboussin.
- Common Stocks and Uncommon Profits (and other writings) by Philip Fisher.
- “The Essays of Warren Buffett,” a collection of Buffett’s annual letters to shareholders.
- The Theory of Investment Value, by John Burr Williams
- One Up on Wall Street and Beating the Street, both by Peter Lynch
- Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay and Reminiscences of a Stock Operator by William Lefevre
Set an Investment Goal
It is a crucial step after starting stock trading. You must make a budget regarding expenditure on each stock. It will ensure you do not incur huge losses. You should do risk assessment should before moving ahead with the investment.
Research on Companies before Investing
Once you have a brokerage account, conduct company research to find out which stocks are providing better returns. You can refer to the Wall Street Journal, CNBC, Market Watch, Stock Chase, Investopedia, etc.
Choose the Business That is performing well.
When you are starting stock trading, it is advisable to you invest your hard-earned money in blue-chip companies’ stocks. Blue-chip companies include Microsoft, Apple, Walmart, McDonald’s, etc.
If you are not in a position to invest in blue-chip companies, then you should find other suitable companies. To do that you should take the following steps :
- Look at the company’s profit margin.
- Analyze the company’s return on equity.
- Look at a company’s past and expected growth
- Compare the rate of earning and growth of a company with its competitor’s firms.
- Look at the company’s debt.
Invest In stocks by Making a careful choice.
Investing in stocks is a great way to create financial security, independence, and generational wealth. To Invest in stocks, you can take the Below listed steps that are as follows :
Buying stock directly from the issuer.
Some companies offer direct stock purchase plans, also known as DSPPS, in which investors can directly purchase the stock of a company without the help of a broker. It is also the best-suited way of buying shares if you are purchasing a small number of stocks.
Open a stock Broking account
The primary step in the process of Stock trading is to open a stock brokerage account. One can open it in a bank, through investment companies, or with an online broker website. Deposit a reasonable amount in it and start your journey.
Once you open a broker account for direct buying of shares under the Direct stop purchase plans(Depp), make a purchase order with the deposit money. You can acquire a desirable amount of stocks. Once your purchase is complete, you receive confirmation of the investment, which you need to keep at all times.
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Some tips regarding Stock Investing
- When you are in the wealth accumulation stage or wealth acquisition stage, you should consider investing in over-weighing stocks that pay low or no dividends.
- Before buying stocks in real markets, try paper trading. It gives a feel of the actual market. It helps understand the stock market clearly.
- Look for chances to buy high-quality stocks at temporarily low valuations and always try to create a diverse portfolio of stocks.
- You can buy stocks from other countries to generate profitability and diversify your portfolio, such as Canadian, United States, Australian and Indian stocks, etc.
- Airlines, retailers, and auto manufacturers are generally considered bad long-term investments. You should consider buying the stock of those companies that have little or no competition.
- Always remember that staying informed about the latest market trends, analysis, Financial results, and the news is essential for being a successful Investor.
- If you hire a financial advisor to provide you with advice regarding investments, then you need to make sure the advisor is fiduciary. They should be charging you a flat fee for service and also look at the experience and educational credential of a financial advisor. It helps make sure that you are receiving good advice on stock investments.
- Always Invest regularly and systematically in the stock market to Generate higher profitability.
- Do not attempt to time the market. Use technical analysis. Do not day-trade, swing-trade, or otherwise trade stocks for very short-term. Do not engage in insider trading. One should not be emotional while trading and do not buy shares on margin.
It is never too late to start investing in stocks, and also, there is no age limit. Anyone who wishes to invest in stock can start anytime with any amount of money that they have.
Stock Trading has the potential to make you into a millionaire or billionaire within a month or year. The only requirement that you need to start stock trading is full knowledge.
It can be both risky and rewarding, depending on the education that you have on the subject matter.
In the end, I would like to mention that stock trading is an excellent passive income source because it requires little to no effort to earn and maintain.