For some beginners, the world of financial markets can seem daunting and unfamiliar. In contrast, to others, it presents a promising realm of opportunities to satisfy the hunger for impressive results. Often introduced to the market through popular media, gaining first impressions from cinematic portrayals of trading such as “The Wolf of Wall Street,” and swayed by the impact of public figures and influencers whose online personas caricature financial gurus, novice investors sometimes embark on their journey into the stock market ill-prepared and without a concrete idea of how best to equip themselves with truly essential and beneficial knowledge.
Nevertheless, everyone must start somewhere. Let’s explore the fundamental principles and initial steps, without which venturing into trading waters is hardly advisable.
- To establish a strong and secure foundation, you should first familiarize yourself with the basics of the stock market and how it operates.
- A stock market or stock exchange is where stocks are bought and sold, with stocks representing units of ownership in public companies. Ownership stake in a particular company is proportional to the number of shares one owns, and it provides a claim to some of the company’s profits and participation in decision-making within it. Representing the UK’s market is the London Stock Exchange; other well-known major stock exchanges include NASDAQ, the New York Stock Exchange, and many more – where established public companies primarily offer their shares. Although they are most commonly traded on over-the-counter decentralized markets, many penny stocks can also be found on major exchanges.
- Private companies first issue shares to raise capital through IPOs, which is the traditional way they become public companies. Public companies continue issuing shares to finance their operations and further growth. The purpose of markets is to facilitate electronic or online stock trading.
- Investors trade stocks based on expectations of future company performance. Market prices reflect investors’ collective outlook on current prospects and, thus, their perception of a company’s investment value.
It’s also good to know about indexes and market performance:
- Indexes are lists or groups of stocks through which the performance of certain parts of the market is tracked, usually representing a number of large national companies. Examples of well-known indexes include the American S&P, Nasdaq, and Dow Jones, the Japanese Nikkei 225, the German DAX, and others. The UK is represented by the FTSE index, with several lists of its own.
- Market news often relates to their performance, although they do not encompass the entire market.
- Before you start investing, or while you are getting started, there are things you need to consider and steps you need to take:
- Of course, first you need to open an investment account. Although you can always trade entirely on your own, as a beginner, you should understand the importance of assessing brokerage firms before investing; the broker you choose to trade through is essentially your partner and representative in trading and can significantly support you. Opt for a larger, more reputable company that aligns with your goals and preferences, offers convenient options, and whose brokerage fees and associated account costs feel comfortable for you. When opening an account, you will provide some default personal information required to verify your identity – which will not take much time and is not a complicated process considering how vital it is to your security.
- Transferring funds to your trading account is a necessary step that provides the budget with which you will make transactions on the stock exchange. This works by electronically transferring money from your bank account to your brokerage account, which may sometimes take up to a few days, or by wire transfer if you prefer the transaction to be processed faster. Only when you’ve ensured funds have been successfully deposited in your brokerage account can you select the stocks that suit your preference. Instead of individual stocks, you can also consider index funds if you wish to start increasing the diversity in your portfolio right away to mitigate risk.
- You don’t have to wait for the perfect timing, regardless of the amount you can invest—you can start right away and set clear financial goals, prioritizing them based on importance and regularly reviewing them. You can aim to benefit from compounding over time without being hasty.
- When you have laid the groundwork by familiarizing yourself with the terms and concepts you need for understanding the essentials of the market and trading on it, and provided yourself with an active trading account complete with setting up your starting capital – you should build a general outline of strategies which you will rely on at the beginning and further build on in the future:
- Assess your financial situation honestly, considering the affordability and risk tolerance involved with your preferred investment style. Be prepared for market declines and volatility. Avoid relying solely on past performance for future gains. Although stocks may offer ownership in profitable companies – trading always comes with risks.
- Decide whether you are investing short-term or long-term. Thanks to the use of leverage, which offers to multiply the trading power of your capital, short-term trading opens up the potential for large profits over shorter periods – however, it also often leads to more significant losses and increased costs. Many retail traders lose large sums of money using short-term approaches. A similarly increased risk is carried by investing in small-cap and growth stocks, even if they do offer the potential for greater and faster growth. Such an example is penny stocks, which are sold at meagre prices – meaning that their eventual rise can achieve significant gains. However, their nature also makes them a volatile option, which means that losses on them can be equally substantial. Assess your options carefully.
- If you opt for investing as a long-term endeavour, avoid immediate, impulsive reactions to daily market news. Build patience and stick to your investment plan. Develop your account gradually by consistently adding investments, and consider involving automation to maintain discipline. Continuously educate yourself to make informed decisions for long-term financial growth, and to keep up with market trends and development consistently. Investing in stocks can be profitable with careful planning, and beginners should follow a structured approach and stay committed to their investment strategy. If you prefer the stability, lower risk, and gradual profit accumulation more characteristic of the long term approach – consider investing in value stocks, large-cap stocks, or index funds for average market returns.
The stock market is a place of business.
Like any other, trading as a business requires dedication to elevate one’s likelihood of success. The adage applies that some talent may be involved, but most of what it truly comes down to is diligence and effort applied. Consistently upgrading your understanding of market trends and developments, keeping yourself well informed, investing in strategy development through market monitoring, managing your expectations reasonably, maintaining your awareness of the inevitable risks, and practising patience – will all be strong allies on your trading journey. While success should never be viewed as guaranteed, you can raise your hopes for it by nurturing a balance between perseverance and being honest with yourself.
The good news is that you don’t need enormous amounts of capital; nowadays, with a decent deal of preparation and awareness, a modest sum of money can get you started on your venture into the stock market realm.
Thanks to the Internet, most aspiring traders can find readily available resources to obtain information, learn, and even actively practice trading and its different strategies. For anyone with a desire to get acquainted with and engage in the field of finance beyond merely fantasizing about the ideal outcome of making profits, this article may be just the beginning of an immersive new experience.
To end with a piece of advice to contribute to such an experience, practice with online trading simulators. These convenient tools allow you to gain investing experience and test strategies without risking real money until you are ready to take the plunge. Explore which trading platforms best suit your needs.
We offer access to some of them HERE, where you can try them with a free Demo Account and get a taste of real market conditions using a virtual practice budget of $10,000.