Understanding the stock market:

To the novice investor, the stock market might indeed appear as something complex and
somewhat scary. But when you have little knowledge about stock exchange, what is stock, and
some of the terminologies in the exchange, then it becomes very easy. This will be a basic
introduction and informative guide; it will include an explanation of the stock market, the purpose
of stock market investment, methods to avoid risks, and building a comfortable feeling as one is
approaching this investment industry.

What is the stock market?

The stock market means markets that exist that involve the sale, purchase, and exchange of
corporate stocks and other derivatives related to the shares of corporate entities in the overall
market. The two most infamous stock markets in the US are the New York Stock Exchange
(NYSE) and the NASDAQ.

Stocks, often referred to as equities, are the financial instruments that personify ownership in a
firm. It means you stand to gain from the difference in the price of stocks when you can
purchase them at a lower price than they are marketed for. However, there is some additional
risk when it comes to stocks, by the way their price moves along with the company’s
performance, the economic factors, the mood of the market, and so on.

Why Invest in Stocks If You Are a Newbie?

Here are some of the key reasons a beginner may want to invest in the stock market:

• Build wealth over time: Consequently, the stock has historically offered the highest average annual return of any asset class vs. bonds, Treasury bills, gold, and savings accounts for many decades. Especially, investing in stocks steadily lets your money grow faster in the long run.
• Power of compounding: When you invest in stocks and get dividend income and capital gains, you’re able to begin earning returns on the cash you reinvested from your profits. These
• compounding effects are capable of snowballing small investments into huge savings over many years.
• Hedge against inflation: Historically though, stocks have tended to provide greater returns than
  inflation, thus keeping your money’s purchasing power intact for the long-term investor.
• Own profitable companies: Stock is that second piece of the equation, and if you own the stock, you have become a part owner in that company, sometimes making money if the stock increases in value or if you receive dividend payments.
  

Stock Investing for Beginners

Follow these basic steps to start investing in stocks:

• Goals: Why invest? Features like retirement, education, house-down payment, and the like will define how you plan.
• Beginner’s guide to the stock market: get to know what you need to know about the stock market by learning basic points such as the relationship between risk and return, diversification, dollar cost averaging, dividends, etc., which can be found in books, on websites, podcasts, and stock market courses.
• Open a brokerage account. Brokerage firms like Fidelity and Charles Schwab will buy and sell stocks. Find out account minimums, fees, investment options, and more.
• Fund your account—deposit money into the account at once, sign up for automatic monthly deposits from your bank, or make weekly or monthly transfers from your paycheck. To be sure, consistency is the name of the game when it comes to investing.
• Construct a beginner’s portfolio. This involves conducting research to identify the various companies in different sectors and industries and then come up with well-established companies that would pass on financial tests. Index funds and ETFs enable the general population to have an opportunity to diversify. It is recommended that investors begin with investing in 5-10 stocks.

Managing risks for the first-time investors

The stock market involves risk as stock prices fluctuate daily, but a few tips can help minimize
risk:

• You need to diversify via sectors, companies, management approaches, etc., so that you are not overexposed to one type.
• Cumulative buying over months and years rather than high sensational buying in weeks or days (dollar-cost averaging). This equalizes price volatility.
• If you invest back the dividends and capital gains, they form more returns and compound at a faster rate.
• Mature quality stocks to retain them for earning growth and disregard cyclical stocks for fluctuating and volatile earnings, which largely depend on chance rather than skills in timing.
• Instead, keep it real—the normal performance level for the stock market is an increase of 6-8% every year, not home runs.

Conclusion

But for stocks, this means one needs to continue learning and adjusting their strategies every
once in a while, but the reward—accumulation of more wealth—may very well be worth it.
Finding the right amount of risk and return for your personal objectives is not a minor task. Still,
if you study the market basics, spread your investments, and think through a sensible investing
pattern, using stocks is a way of achieving financial security.