Rudiments Of Investing In Stocks

The following is a guest blog post:

Financial markets can be a very exciting platform to invest in and create huge wealth for both yourself and your generations to come. Within the financial markets there are both capital markets and money markets to choose from when making your investment decision. For money markets, you will be focused on them if you have a short term investment horizon; while capital markets are mostly preferred by investors with a long-term investment horizon. Among the most common and most preferred capital investment instruments by individual investors are the stocks.

Investing in stocks can be a very lucrative business if you venture into the market with a clear understanding of the basic rules and regulations that govern investing in stocks. To begin with, you need to define yourself as a long term investor or as a short term trader within the market. The two different categories have their uniqueness both in the length of their investment periods and in their view and analysis of stock markets.

As an investor you will be more focused on the long term capital gains and dividend returns from your investment in a given company; while on the other hand as a trader you will be focused gaining from the day to day price changes at the stock market. In terms of analysis, as a long term investor you will make your investment decision based on a deep dive analysis of your target company financial performance through fundamental analysis. As a trader, your focus will be on reading and interpreting the day to day price movements for your target companies and charting out trends to assist you in doing technical analysis that will dictate the buying and selling decisions you make each day.

There is no hard line separating the two types on investors mentioned above though. For a hybrid stock investor, a combination of the two investment strategies is preferred. This helps you as a hybrid investor to both maximize your short term gains from the stock market as the prices keep fluctuating up and down; as a well as have a firm grip on the long term capital gains from your investment as the stock price of your chosen company rally up over the years.

To invest in the stock market, you will need to open a stock trading account with a stockbroker of your preference. The decision on choosing your stock broker is often determined by the level of personal support you need and how often you would like to interact with your stockbroker when making the buying and selling decisions. The transaction and commission fees charged by different stockbrokers will also determine who you go to since you always want to minimize your costs and increase your revenues. The track record for the stockbroker based on past performance should also guide you in decision making since you also want to engage a stockbroker who will give you the highest return at any given market season.

Having opened a trading account with your preferred stockbroker, the next thing is to deposit some money into the account so as to start buying stocks. Different individuals generate their investment capital from different sources. Most people get their investment capital from their savings in commercial banks. Others make regular deposits into their trading account from their regular incomes from their businesses or from their employment salaries.

In some cases however you might not have the cash in hand and you want to buy a stock that is trading at a very deep discount based on its prevailing market price. In this kind of a situation you may borrow money from your bank to buy the stocks and repay later after selling the stock at a premium when the price goes up. However, before you go to get a personal loan to buy a given stock, you should always consult your financial advisor to ensure that the upside potential of the stock is more than the interest you be charged for the borrowed money.

Once you have your account up and running, your work will now will be to study and analyze stock market dynamics. For short term traders, your focus will be on how the stock prices for your chosen portfolio are fluctuating and when you need to make the buy or sell decision in order to maximize your gains. On the other hand, for long term investors, understanding the fundamental aspects of the companies within your portfolio and their strategic plans will help in making the right investment decisions over the long run.

4 thoughts on “Rudiments Of Investing In Stocks

  1. That’s a good overview DivHut. I’ve always been a trader and would like to make more long term dividend stock plays. I just can’t bring myself to do so with the current market highs. When we see a correction, I will be more apt to go long in various stocks. I do enjoy trading as well so I will be more of a hybrid stock investor. I’m thankful for you and others who share their portfolio’s and are disciplined buy and hold investors!
    Cash Lab recently posted…August 2016 – Monthly Financial Update – From Russia with LoveMy Profile

    • Hi CL,

      That’s the beauty of personal finance… it’s personal. Everyone does what they feel comfortable doing. Personally, I would never consider myself a trader. I tend to just buy and hold for years and years. It does take a lot of discipline to just sit on your holdings, but as long as they continue to pump out an ever increasing passive income stream I’m happy. I held on to every single share in my portfolio during the financial crisis and believe me it was not easy seeing my entire portfolio deep in the red. It makes you question everything but I held and continued to buy more each month as I always have. I appreciate your kind words.

    • Hi FC,

      Glad you enjoyed this summary. Personally, I think it’s always best to have a long term horizon. People who tend to trade frequently do not have the best results plus incur a lot of trading fees and are less tax efficient. Sometimes, staying the course is the best action one can take, especially during times of extreme market volatility. Thank you for stopping by and commenting.

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