"The four most dangerous words in investing are: 'This time it's different.'" - Sir John Templeton
"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher
Investing in the stock market can be fun, exhilarating and profitable. Yet you can also lose everything that you have invested. Learning the basics of the stock market, what it is and how it works, is a great starting point. If you are interested there many great books on investing, just check out the Recommended Reading page for some good titles.
When you buy stock you are buying ownership in a company. Your shares represent your ownership stake and award you privileges, such as the right to vote on certain issues. When you buy shares in a company your hope is that when you go to sell them in the future that the price will have gone up and you will make a profit. Some traders will hold their stock positions for a very long time, sometimes years. Others will hold their position only for a few hours or days. While we won't dictate how you trade, if you are a novice without a strong financial reserve we recommend leaving day trading alone.
Investing in the stock market is not right for everyone. You must be willing to deal with daily price fluctuations since a stock's price will go up and down throughout the trading day. Before making an investment you must be willing to put in the time to review financials and how the company is run. Doing your homework before making an investment is called due diligence and will be extremely important as you begin investing.
If you decide investing in the stock market is right for you there are a few things to consider up front.
First and foremost, be prepared to lose your entire investment. Timing the market is arguably impossible and even the professionals will lose money. Picking individual stocks to invest in is similar to finding a needle in a haystack. With that said, if you have an appetite for risk then proceed with caution.
The second consideration will be what broker you want to use. Not all brokers are created equally so you will want to do your research on which ones offer the lower trading fees, better analytical platforms and best ways to deposit and withdraw funds.
Finally, you will want to have a strategy for investing. Don't go in blindly and start buying stocks without doing your due diligence. This is not to imply that proper research will guarantee a winning trade, but it is better than making a blind decision. If you want to practice making trades before using real money you can open a free trading simulation from MarketWatch. This is a fun and educational way to begin learning about how to trade stocks that carries no financial risk to you.
When you begin investing you will be introduced to some new terms. Below are a few you should get familiar with before trading:
Ask Price - The price at which you, the buyer, is willing to buy a stock and another party is willing to sell
Bear Market - Occurs when stock prices are generally falling (down trend) and investors are inclined to sell.
Bid Price - The price at which you, the stock owner, are willing to sell a stock and another party, such as a dealer or another investor, is willing to buy.
Bull Market - Occurs when stock prices are generally rising (up trend) and investors are excited to buy.
Commission - This is one way in which your brokerage makes their money. You will be charged a fee when you buy and sell your stock. It's important to factor in these fees since they will eat into your profits.
Long Position - This is when you buy a stock with the hopes the price will go up and you can sell for a profit. This is the main trade type you will probably focus on if you trade.
Short Position - This is the opposite of a long position. You firstsell the stock and buy it back later. The goal is to sell the stock at a high price and buy it back at a lower price in the future. This can be very dangerous and expensive if the stock moves against you and the price goes up. Extreme caution should be exercised when shorting a stock.
Ticker (stock) Symbol - A one-character to four-character alphabetic symbol that identifies a publicly traded company. If you wanted to trade Tesla Motors Inc. you would search for TSLA.