A lot of people want to know how to invest in stocks … but few actually do it. Maybe it seems too complicated or people think they don’t have enough money.
Think again! You don’t have to have a trust fund to get involved in the stock market, and it doesn’t have to be overly complicated or scary.
To be clear: I’m a trader, not an investor. I’ve chosen to make a career out of day trading low-priced penny stocks, but that’s not the only option for getting involved in the stock market.
However, I think it’s important to educate you on some of the different styles out there so that you can get a better idea of what might work for you.
There are a lot of different approaches to the stock market and a lot of different ways to get your feet wet. Short-term trading, long-term investing, or any number of options in between … it’s all good, and it’s all about what works best for you.
Really, it’s mostly a matter of choosing the method that works best with your account size, risk tolerance, and overall goals.
In this post, I’ll educate you on some of the basics of stock market investing. I’ll include some foundational knowledge and an explanation of common modes of investing so that you can better determine which approach is best for you.
Table of Contents
- 1 What Is the Stock Market?
- 2 Basic Terms You Should Know Before Investing in Stocks
- 2.1 Bear Market / Bull Market
- 2.2 Breakout / Breakdown
- 2.3 Broker
- 2.4 Catalyst
- 2.5 Day Trading
- 2.6 Downtrend / Uptrend
- 2.7 Earnings Report
- 2.8 Float
- 2.9 Fundamental Analysis / Technical Analysis
- 2.10 Index
- 2.11 Paper Trading
- 2.12 Pattern
- 2.13 Penny Stock
- 2.14 Position Trading
- 2.15 Security
- 2.16 Short Selling
- 2.17 Stock Chart
- 2.18 Stock Screener
- 2.19 Swing Trading
- 2.20 Trading Journal
- 2.21 Trading Plan
- 2.22 Volume
- 3 How to Get Started Investing in Stocks as a Beginner
- 4 How to Read Stock Charts — Step By Step
- 5 How to Know if You Are Ready to Start Investing in Stocks
- 6 How to Find Great Stocks to Invest In
- 7 5 Tips on How to Invest in Stocks for Beginners
- 8 The Final Word on How to Invest in Stocks
What Is the Stock Market?
The stock market isn’t a single thing. It’s a series of stock exchanges or marketplaces where people exchange stock shares. These exchanges provide volume and liquidity to the marketplace.
Here are some key exchanges to know…
New York Stock Exchange
The NYSE is a big, famous market in New York where traders are physically on the floor. Not just any company warrants a spot on this exchange. They have to meet certain requirements to keep the market legit. The NYSE mainly has big, blue-chip companies.
Short for National Association of Securities Dealers Automated Quotations, the Nasdaq is an electronic exchange.
Here, market makers (MMs) have an inventory of listed stocks, and they’re ready to buy or sell, creating and moving the market.
Companies have to meet certain standards to be listed here, too. NASDAQ includes mostly small, medium, and large market cap technology companies, but it includes stocks from other sectors too.
Not all stocks meet the requirements of the big exchanges. It might be because they’re new companies or in emerging sectors.
Companies like these might be listed on over the counter (OTC) markets. These stocks are often lower in price … but higher in risk.
OTCBB (Over the Counter Bulletin Board)
On this electronic exchange, you’ll find companies that don’t meet the requirements of bigger exchanges, since there isn’t a minimum asset requirement. However, companies listed here must remain current with SEC filings.
OTC Pink Sheets
Stocks on this exchange aren’t required to submit or register SEC filings, so you can’t necessarily trust their reporting. And their volume and liquidity are often fairly low.
The lack of required reporting makes it super important to do your research when trading stocks on this exchange.
Basic Terms You Should Know Before Investing in Stocks
The stock market can seem like it comes with its own language … and it kinda does. Over time, you’ll start to pick up some of the common parlance, but to help get you started, here are some key terms to know.
Bear Market / Bull Market
- A bear market is a downtrending market characterized by pessimism and low confidence.
- A bull market is an uptrending market marked by optimism and high buyer confidence.
Breakout / Breakdown
- A breakout is a stock price that moves out of a support or resistance level with higher volume.
- A breakdown is a stock price that moves below a level of support with higher volume.
This is the sales agent who facilitates your stock buy and sell orders. It could be an individual or a firm. These days, many brokers are online. Some brokers provide financial advising or planning services while others just execute orders.
A catalyst or news catalyst is anything that can affect a stock’s price, like earnings, new products, etc.
A style of trading that involves entering and exiting a position within the same trading day.
Downtrend / Uptrend
- A downtrend refers to a security that’s moving lower in price over time.
- An uptrend refers to a security that’s moving higher in price over time.
Earnings reports are filings that public companies make. They’re issued quarterly and annually. The reports include things like net income, earnings per share, and the company’s forecast for the future. Earnings reports can help you gauge the financial health of a company offering a stock.
The number of shares available to the public for trading.
Fundamental Analysis / Technical Analysis
- Fundamental analysis refers to looking at the company behind the stock. This means looking at earnings reports, news, and other factors related to the company that could affect the stock price.
- Technical analysis refers to looking at a stock’s price action over time. This involves poring over the stock chart to look for trends in the price movement over time.
Want to learn more about stock analysis? Check out this post.
In the stock market, an index is a hypothetical portfolio of stocks that offers a benchmark for measuring the market. You can’t directly trade an index, but there are certain investment vehicles that follow indexes (that are generally purchased through qualified professionals).
Paper trading is virtual trading. You can execute buy or sell orders with actual tickers, but it’s simulated — you don’t actually risk money. It’s a way to test strategies before you put real money on the line.
In the stock market, a pattern is a repeating price movement that occurs with enough regularity that it’s identifiable.
A low-priced stock — in spite of the name, stocks that trade under $5 per share are considered penny stocks. These are the types of stocks I focus on as a trader.
With position trading, you hold positions for longer periods of time, holding out for major moves. This might involve holding a stock for months or longer.
A financial instrument with monetary value that can be traded. Stocks are one type of security.
A method of trading where you attempt to profit from a stock’s price going down. First, you borrow shares from a broker, then you sell them.
Your hope is that the price continues to fall, and you can buy them back at a lower price before giving them back to your broker, keeping the price difference as a profit. Short sellingis not advised for beginners.
A stock chart offers a picture of a stock’s historical price and trading volume. It’s expressed in either a line, bar, or candlestick chart.
A stock screener is a program that lets you filter for stocks based on criteria that you set. For instance, you might filter for the biggest gainers for the day. StocksToTrade is an example of a stock screener and the one that I use.
A trading method where you hold stocks for a short but unspecified amount of time — anywhere from overnight to a few months, or as long as it takes for the price to “swing” into profitable territory.
Also called a trading diary, this is a log where you record all your trade details, including entry and exit, time of day, notes on why you made the trade, and how it worked out.
This is your game plan for a trade, including your expected entry and exit points, risk/reward, and trading thesis.
The number of shares traded for the day or another time period.
How to Get Started Investing in Stocks as a Beginner
Let’s dig into some of the foundational knowledge you’ll need before you start putting money into the market. Here are some important basics.
How to Buy Stocks
What exactly do you need to get started buying and selling stocks?
Not much, actually. To execute trades, you need a brokerage account. You’ll also want some trading software to help you find and track stocks. Often, these two things are available in a single platform.
Learning how to buy stocks is a cinch. It’s as easy as placing an order on GrubHub.
The hard part is actually making smart decisions about what stocks to buy and when.
That’s why I’m also a big fan of the idea that the most important part of learning how to buy stocks is investing time and effort in amassing knowledge about the market. Knowledge is power when it comes to the stock market. The more you know, the better informed your decisions will be over time.
When to Sell Stocks
When should you sell stocks? If only there was a simple answer. Ultimately, this is something you’ll need to figure out for yourself.
A trading plan can be extremely helpful in this regard. This is a plan where you determine your entry and exit points before you go into a trade. This can help you know when to take profits … and it can also tell you where to cut losses.
Need help making your trading plan? Check out this post.
How Much Money Do You Need to Start Investing in Stocks?
That depends. It’s possible to get started with some brokers with just a few bucks. Others will require thousands of dollars or more.
You don’t necessarily need a huge account to start trading low-priced stocks. This is one reason why it’s appropriate for people with small accounts.
For example, my most profitable student to date started with an account of $1,500 and now reports over $8 million in profits.** His results aren’t typical, but it shows that a huge account isn’t vital for success.
It also depends on how you want to start. For instance, to short sell, you need $2,000. To buy into a mutual fund, you might need anywhere from $500 to a few thousand to get started.
My best advice? NEVER put in more money than you can afford to lose — there are no guarantees in trading or any type of investing.
How to Read Stock Charts — Step By Step
A stock chart offers you a visual explanation of a stock’s price movement over various periods: daily, weekly, monthly, and yearly.
Understanding a stock chart is an important step toward understanding the trade, so it’s super handy to know how to read them.
Here’s some of the key information you’ll find on a stock chart and what it means:
- Previous close: The closing price for the last complete trading day.
- Open: Today’s opening price.
- Bid: The price people are willing to pay for the stock right now.
- Ask: The price people are asking for as a seller right now.
- Days’ range: The range between the lowest and highest prices of the day.
- 52-week range: The lowest and highest prices for the year.
- Volume: The number of shares traded for the day. The higher the volume, the more shares trading hands.
- Average volume: The average number of shares traded per day over a specified period.
This information is pretty standard for a chart, but the visual expression can differ depending on the type of chart. The key types of stock charts are line charts, bar charts, and candlestick charts.
If you’re interested in a more in-depth guide about how to read the different types of stock charts, check out this post: How To Read Stock Charts and Patterns: A Beginner’s Guide.
How to Know if You Are Ready to Start Investing in Stocks
Just because it’s easy to start buying and selling stocks doesn’t mean that investing is easy. Don’t tread lightly here.
Here are some things to consider before you begin putting down your hard-earned cash…
Define Your Goals
What are your goals for investing? The more specific, the better. I’m a big fan of goal-setting theory, which theorizes that the more specific and complicated your goal is, the harder you’ll work to attain it. So if your goal is something vague like “get rich,” try harder.
Understand Your Risk Tolerance
Risk is inherent to the stock market — there’s no way around it. But that doesn’t mean you should love risk. In fact, you shouldn’t. You should hate it and be motivated to do whatever you can to avoid it.
It’s smart to start your investing journey with a solid idea of what your personal risk tolerance is. For instance, if the fast pace and volatility of penny stocks make your stomach churn, position trading might be a better pick for you … it all depends on you.
One of the best ways to really get an idea of your risk tolerance is to educate yourself on different methods of investing. See what’s most appealing to you but still within your comfort zone.
If you’re so inclined, there are plenty of quizzes online to help figure out your risk tolerance, too.
I like to say that as a trader, you have two accounts. One is your brokerage account … the other is your knowledge account. This is relevant to any type of investing, though.
Before you can make the former bountiful, you’ve got to invest in the latter. That means beefing up your stock market knowledge.
Get your priorities straight! By learning all you can, you’ll equip yourself with the necessary tools to make intelligent decisions with your money.
How to Find Great Stocks to Invest In
Where should you look for stocks? Here are some common approaches to finding them.
Buy Stocks Online
This is the DIY approach. You make your own decisions about stocks based on your independent research and execute trades via your broker online. This is what I do as a penny stock trader. I’m solely responsible for my trading decisions. It requires a lot of diligence and research, so it’s not for everyone.
An investment club is a group of individuals who pool their resources so that they can make a joint investment. Typically, club members investigate different investments, then the group makes final decisions together.
This is a broker that provides services beyond just executing trades. They might provide services like investment advice, research, retirement planning, and tax advisement to name a few.
An individual or firm that manages portfolios for individual or institutional investors. Usually, a money manager represents expertise in a variety of areas. The idea is that they’re better educated than you and can make intelligent decisions for you.
This is a type of mutual fund that either tracks or emulates an index such as the S&P 500.
A mutual fund is composed of a variety of different securities rolled into one big investment vehicle. They’re funded by many different investors and managed by a professional who’s responsible for allocating the funds.
A hedge fund pools capital from investors and institutional investors and allocates the funds to a variety of assets. They’re not for most newbies: they typically require an initial investment of $500,000 or more.
5 Tips on How to Invest in Stocks for Beginners
These are some important tips to consider before you get started with trading.
1. Cut Losses Quickly
If you watch my video lessons, then you probably already know that my #1 lesson in trading is cut losses quickly. This is true for any style of investing though … and in life in general!
If it’s not serving you … cut it off. If an investment goes sour, whether it’s a trade, a real estate deal, or whatever, have the discipline to cut losses — FAST.
Yes, it can hurt. But what can hurt a whole lot more is holding and hoping. Don’t hang on to an investment hoping for a turnaround only to watch it dwindle in value. Hold and hope is not a strategy!
That’s why I urge my students to start small. Trading small at first to minimize losses is a strategy.
If you put all of your account into one type of security, it’s the equivalent of going out to sea with a boat with no life rafts. If the boat goes down, everything will be sunk.
Diversification means spreading out your account across a variety of investment vehicles. This could mean choosing stocks from different price points or sectors. It could even mean investing some of your income in stocks and some in real estate.
Most successful people don’t rely on just one stream of income. Don’t put all your eggs in one basket.
3. Choose Your Broker Wisely
You probably wouldn’t even buy a new toothbrush online without checking the reviews. So don’t get lazy with picking a broker.
Some brokers can tempt you with low rates and promises too good to be true. But always dig deeper, or you end up paying in other ways. Some brokers are shady, so do your research.
Your broker is responsible for your money and executing trades for you. Choose a good one with a fee structure or minimums that work with your account needs.
Check out this post for tips on how to find the best broker.
4. Learn the Rules
If you were going scuba diving for the first time, you’d take a lesson or two to learn how to breathe underwater before jumping in.
As a trader, it’s important to get your bearings before diving into the financial markets. That means focusing on investing in your education before investing your actual cash.
If you’re interested in trading low-priced stocks, my Trading Challenge could be a great fit for you. This is an educational program that I created based on what I wish I’d had available to me when I started out as a trader.
As your teacher/mentor, I want to show you what I’ve learned over the past 20+ years of trading. I’ll show you both the good and the bad to help you speed up your learning curve.
I’ve got a ton of video lessons, webinars, and other resources … you really get what you pay for in terms of building up your education account. Apply for the Trading Challenge today.
5. Find an Investing Style That Works With Your Budget
You don’t need a ton of money to start investing. However, the investment types available to you may be limited depending on your budget.
Personally, I find that with a small account, trading low-priced stocks is the most effective method of getting a return. Since the stocks are low priced, it’s accessible to even small accounts.
The Final Word on How to Invest in Stocks
There’s more than one way to invest in stocks. Your personal constitution, account size, and level of interest will play a big role in deciding what approach is right for you.
I’ve chosen to trade low-priced stocks, but that’s only one option. Depending on your personal goals and style, there are any number of styles of trading or investing that might be better suited to you.
There’s no right or wrong decision — it’s all about your specific goals and what will get you there most effectively.
But no matter what style of investing you choose, education is key. If you’re intrigued by the idea of day trading or trading penny stocks, my Trading Challenge could be a proactive step toward making your goals a reality.
How do you want to invest in the stock market? What approaches appeal to you the most? Leave a comment and let me know!