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Robert Greene, a New York Times best-selling author and public speaker, mentioned three mindsets for attaining mastery in his book Mastery:
- primal curiosity;
- value learning above everything else; and
- gather skills and uniquely combine them.
The fact that you are reading this is a tick to the first mindset—you’re curious as to how to be wise in the stock market. You’re now onto the second mindset—learning.
Stock investing is a risky arena. You must know the rules and learn how to play the game. Start your journey by knowing the basics.
Just the Nuggets
- Mastery works by first understanding the basic terms used in the stock market.
- To buy your first stocks, you must prepare a financial plan, understand and observe the market, choose a stockbroker, stalk on your prospect companies, and select your top picks.
- You can make money in stocks through dividends and capital gains.
- Learn to manage risks by understanding why the market price fluctuates and applying the five strategies to keep earning.
- Common mistakes in the stock market are investing without a plan and letting emotions rule over logic.
Basic Stock Terms for Beginners
People get easily intimidated by topics they understand little to none at all. To get that out of the way, these are some of the basic stock terms you’ll encounter later and more.
|BASIC STOCK TERM||DEFINITION|
|Average Price||The average of buying prices per stock in your portfolio (a compilation of your owned stocks and their daily gains and losses). This price will be the basis for your gains and losses in the portfolio.|
|Balance Sheet||Financial report of a company that lists its assets (stuff owned), liabilities (stuff owed), and shareholders’ equity (capital and earnings).|
|Bear Market||A condition where the market prices drop by at least 20% from the previous and continue to decrease more.|
|Bull Market||A condition where the market prices are high and continue to rise. This indicates a good sign of the country’s economy.|
|Capital Gain||The profit you earn from selling a stock at a price higher than when you bought it.|
|Capital Gains Yield||Rate of increase in the price of a stock and the like.|
|Compounding Interest||The interest you earn on the capital with its interest for a given period of time. Yes, this is interest on top of another interest, as a multiplying effect.|
|Dividend||Earnings of a company distributed to its investors.|
|Dividend Yield||A ratio that shows how much a company gives annually to its investors relative to the share price. The higher the dividend yield, the better.|
|Fundamental Analysis||A technique used to evaluate the stock value of companies by analyzing their income reports, balance sheets, and other financial statements.|
|Income Report||Financial statement of a company that lists its income, expenses, profits, and losses.|
|Recession||A significant period where the market trend reaches an all-time low.|
|Return on Investment (ROI)||A ratio that shows how much you earn (or lose) from the money you invested based on a given period.|
|Risk Tolerance||Determines the degree of risk you can tolerate if you want to earn from your investment.|
|Sector||Classification of stock companies according to the role they play in the economy. It groups companies according to industry type.|
|Share Price||The price of a single unit of share sold by the companies in the stock market.|
|Stock Company||A corporation whose capital is in the form of shares of stock.|
|Stock Exchange||An organized and regulated system where securities—financial resources, like stocks, that may give you income streams—are traded. |
The top US stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).
|Stock Index||A portfolio of companies in a country that collectively represents that country’s market or economy. Famous examples are the Dow Jones Industrial Average (DJIA) and the S&P 500 Index.|
|Stock Market Volatility||The constant changing of market price trends through fluctuations in the stock market.|
|Stock Symbol (ticker)||A unique code or abbreviation assigned to a public company for easier identification. It may be alphanumeric and may range from one to five characters. |
As an overview, you can view the list of stock symbols in NYSE here.
|Stockbroker||A person or firm approved and regulated by the state laws to buy and sell stocks for you.|
|Technical Analysis||A technique used to predict the future movements of the market using patterns supported by historical data and statistics. It involves a lot of charting, indicators, and the use of analysis tools.|
How to Buy Your First Stocks
1. Financial planning
This is technically unnecessary if it’s just a matter of buying your first stocks. However, if it’s about how to invest wisely in stocks, then financial planning is a must. Take the Financial Planning Pyramid as your guide.
It is recommended to build your foundation starting with the bottom two tiers. The idea here is to invest money you can afford to lose. In this way, you’d be more emotionally stable no matter how the market behaves. More about the stock market volatility later.
2. Understand how the stock market works
Now you have the go-signal for wealth accumulation, and you’re setting your eye on the stock market. But how does it work?
To put it simply, stocks or equities are shares of a company that they sell to the public for investments. Why do they do this?
There are a number of reasons, but it’s mainly to raise capital for future projects. For example, your favorite fast-food chain company is expanding across the country. Instead of using their profit, they get a new stream of capital from investors. When you buy a share from a company through stockbrokers, you are putting your money in their hands and trusting them to increase your money’s worth over time.
3. Read and observe the stock market
Much like traveling to a foreign country—before you engage with the locals, you observe their culture first. In analogy, the locals are the experienced investors and the culture is how different types of investors behave in the stock market.
You must do your research through any of the following recommended tips.
- Read business sections in news tabloids.
- Watch crash courses about the stock market on YouTube.
- Join social groups so you can familiarize yourself with the jargon slowly. Observe how investors react to each other’s speculations.
- Read blog articles about stock market investing.
- Look at the charts and observe how investors react to the movements.
4. Choose a stockbroker
Traditionally, only rich investors can buy stocks through a stockbroker. But today, the stock market is more accessible to typical households. In fact, more than half of U.S. households have stock investments.
This is because of online stockbrokers who built efficient systems to make stock investing easier and done in just a few clicks.
Make sure to check if the stockbroker you’re interested in is authorized by the Securities and Exchange Commission or the equivalent agency in your country. For example, in the US, you can check if the individual or firm broker is on their official list through BrokerCheck.
And then the rest is according to your preference already. Don’t forget to look into the brokerage fees and most especially, their system and online platform interface.
5. Stalk on your prospect companies
Remember—once you buy shares from a company, you are their part-owner. So, make sure to put your money where it’s worth it. Take advantage of their balance sheets and income reports—these are publicly accessible. As an investor, it’s your responsibility to see where your company is heading.
Later, you’ll learn what types of companies allow you to earn big or fast.
6. Buy your top picks
A long list of factors is to be considered before buying your first stocks, which requires a much closer look at investing techniques. But basically, the approach is knowing what stocks to buy and when is the right time to buy them.
How to Make Money in Stocks
There are two ways to make money in stocks—dividends and capital gains. However, note that these gains are taxable just like other income.
When businesses are going well for companies and they gain so much profit, they distribute these earnings back to their shareholders through dividends.
You get capital gains when you sell your shares at a much higher price than when you bought them some time ago. This is possible because the price in the market fluctuates over time. Later, this would be visualized in the earning strategies.
How to Manage Risks in the Stock Market
In any investment, there will always be risks of making bad investment decisions and losing money. If somebody promises you a sweet guarantee, run the other way because that smells fishy!
The key to earning in any investment is to manage the risks by understanding how it works and applying strategies to earn.
Why Market Price Fluctuates
There are too many unquantifiable factors affecting the stock market price which makes it highly volatile. It’s mainly fueled by the perception of investors. Nonetheless, just because you’re not one step ahead of the market trend doesn’t mean you’re gonna stop anticipating it. What you should do is understand the trend so you can follow it closely, and be ready to act when the opportunity comes.
One thing’s for sure, the market trend is governed by the Law of Supply and Demand. As to what influences the buyers to buy and the sellers to sell, that may be dependent on the news and current events.
How Much Impact Does the President Have on Stocks? by McCabe and Associates
Current events like natural disasters and health crises may bring down the market trend because the operations of companies are jeopardized. News about expansion projects may drive the market trend up because of expectations from the investors. Bottom line is, investors will always want to cut losses. They follow the speculations of cause-and-effect relationships between news and the companies’ performance.
Also, there is a ripple effect on the global stock exchange markets. The strongest market is in the US. It has the greatest and most influential bearing on how the market trend behaves generally. One striking realization to learn from the COVID-19 pandemic is that the world is connected no matter how far away sovereign countries may seem to be.
Why Investors Might Think Twice about Chasing the Biggest Stocks by Madden Funds Management, LTD
Strategies to Keep Earning
To avoid losses, you’ll have to apply strategies directed to maximizing the dividends and capital gains.
1. Choose the right company
For long-term investments, it is preferable to invest in blue-chip companies. It’s because their stocks are proven to be stable throughout the companies’ history. Though the possibility of bankruptcy is still there, the risk is least likely.
See the blue-chip companies in your country here.
You can also choose companies with high dividend yields. For example, there is a group called Dividend Aristocrats consisting of companies that showed an annual increase of dividend payments for the last 25 years.
If you opt to invest in non-blue chip stocks, just make sure that you follow the performance of your company through fundamental analysis. Be on the lookout for news from the company, the current events, and the effects it could have on your company. Most essentially, be updated with the numbers reported regularly by your company.
2. Buy low, sell high
Take advantage of the increase in price value over time. Let’s take the market price history of Netflix, Inc. for example. Its stock symbol is NFLX.
Suppose you bought 10 NFLX shares on January 4, 2016 at $99.88/share. Four years later (January 4, 2020), you see the trend go up. To harness capital gain, you sell your 10 NFLX shares at $332.23/share. In four years, you had a return on investment (ROI) of +232%!
However, take note that the opposite—capital loss—can happen. In times of a recession, like during the COVID-19 pandemic, you may experience a loss if you sell at a lower price than when you bought it.
This works for both long-term and short-term investments. As long as you sell at a higher price than your buying price, you will not lose money. The question is, how long do you have to wait out before you sell?
You would have to apply technical analysis, although this strategy works mainly on speculation. At least, it’s speculation backed by market history and statistics. Thus, learning technical analysis is huge work. But just like any journey of mastery, take it slowly.
How Your Brain Impacts Your Investment Decisions by Karpus Investment Management
3. Buy and hold
What if the trend continues to go down? The general rule is to apply the buy-and-hold strategy.
For example, you bought NFLX shares at $100. Four months later, the price goes down to $80. Treat it as a discounted sale price. You buy more shares at $80 and hold until the trend goes up again. As a result, your average price moves down to $90 from the original $100. That’s why this is also called the averaging down strategy. You adjust your original buying price lower in the hopes of acquiring greater returns when the trend picks up again. When that opportunity shows, you can now sell high.
4. Reinvest earnings
Once you earn, reinvest them. Buy another set of shares at the current market price, with strategic insight that it will continue to rise with time. This is how you take advantage of compounding interest. The bigger capital and the longer time you wait for it to grow, the more rewarding it would be because of the multiplying effect of compounding interest.
5. Diversify your portfolio
You can reinvest your earnings in other companies as well. But don’t put all your eggs in one basket. This is a famous rule in the world of investing.
It just means do not put all your money in one place. Give yourself options by choosing companies from different sectors. In this way, when one basket falls, you still have other baskets available.
You don’t want to invest all your money in the transportation sector in times of health crisis, like the COVID-19 pandemic. Transportation will be held up, and the prices would most likely go down more than some sectors do.
Should You Invest Your Entire Investment Portfolio in a Single Management Strategy? by Doug Hutchinson, CFA® (WrapManager)
Reflection Leads to Better Investment Decisions by Matt Olver, CFP®, AEP®, CEPA (Cerity Partners)
Common Stock Investing Mistakes
There is no guarantee that you won’t make mistakes after reading all the stuff about the stock market. But being knowledgeable enough will help you prevent the following scenarios.
Investing Without a Plan
Do you want to earn big in the long run? Or earn fast through short-term investments? Whatever you prefer between the two, you need to understand that everything is a process, and you shall not take it lightly.
Some people enter the stock market without understanding it first, just because they want to fit in with the latest trend. So they skip the process of knowing their risk tolerance profile, which is the first step to discovering the right investment vehicle for them. Always remember, think before you act.
Emotions Ruling Out Logic
Your investing journey may have been smooth sailing in the beginning, but you may still suffer losses and miss opportunities along the way if you let these demons—greed and fear—rule your head.
The price continues to rise in a bull market but you don’t click the Sell button because you’re hoping for the price to go higher—until it doesn’t, and you missed the opportunity.
The price plunges in a bear market and you start to panic. To prevent losses, you sell low. Ironically, you suffer losses because later on, you discover that what comes down will eventually bounce back up (if your company has shown resilience in the past).
These emotions throw logic out of the window. If you don’t practice handling your emotions, you are likely to commit investment mistakes even if you already know all the hows and the strategies to minimize risk. The market is already volatile enough. You must handle the market with sound judgment if you want to have the upper hand.
Managing Emotions and Expectations during Market Uncertainty by Eric Nager, CRPS® (Southern Capital Services, Inc.)
You have ticked another mindset to achieve mastery, but only when you’ve applied your learnings will you be able to hone your skills—the last unchecked mindset.
Continuously revisit the three mindsets like a cycle. Inevitably, you will encounter mistakes along the way. But do not worry—to fail fast is to learn fast. Always keep a curious mind so you would never stop learning, and then you’ll be highly skilled. Eventually, with consistent practice, you will master the stock market.
Our References and Further Readings