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40 Things To Know Before Entering The Stock Market

TristaSeptember 26, 2019
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26. Active vs. Passive

Momentum trading is known as an active investment strategy. With proactive strategy, investors are working to outperform benchmark indexes. Most active investors are confident that they have above-average trading skills. Active investors are incredibly hands-on and must work with someone who acts as a portfolio manager.

Strategies like buy and hold are known as passive. These types of procedures are employed to minimize the costs of transactions. Those that use passive investment strategies are convinced that it is impossible to time the stock market. Passive investing tends to be the more popular type of investing strategy.

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27. Long Short Strategy

In a long-short strategy, an investor chooses several equities and ranks them according to their combined return power. Investors take long positions in stocks that will most likely appreciate. Then they short positions in stocks on the decline. With this strategy, investors aim to minimize market exposure due to volatility.

Investors use this method to profit from long stock gains as well as short price declines. Most of the time, the long-short strategy earns a profit. This type of approach is most popular with hedge funds. Hedge funds tend to use a market-neutral plan that has both long and short positions.

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28. Pairs Trading

When investors chose pairs trading as their trading strategy, they find similar pairs of stocks and combine their prices linearly. This strategy is neutral, allowing investors to profit from pretty much all market conditions, including sideways, uptrend, and downtrend movements. 

Investors have used pair trading since the 1980s where it was pioneered at Morgan Stanley. This strategy requires market timing, strong decision-making skills, and good position sizing. There isn’t much of a downside to pairs trading, but opportunities are scarce due to the dynamics involved. For success, a trader must be quick and one of the first to capitalize on a movement.

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29. Value vs. Growth

Value stocks provide an excellent return because they trade below their actual worth. They appeal to value investors through lower prices compared to a stock’s sales, dividends, or earnings. Through the inefficiencies in the stock market, investors can earn a nice profit.

Growth stocks have an above-average growth rate for the current market. This type of stock does not pay dividends so companies can reinvest earnings to accelerate their rate of growth. Unlike value stocks, investing in growth stocks is quite risky, mostly because of the lack of dividends.

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30. Indexing 

When an investor purchases a small number of shares in a market index like the S&P 500 or an index mutual fund, it’s called indexing. This type of investment strategy is passive if held for a long period. It can be active if a trader uses an index to enter and exit the market fast. Indexes are used in the stock market to represent specific market segments.

The top market indexes in the United States are the S&P 500 and the Dow Jones Industrial Average. The S&P 500 is weighted to give greater weight to stocks in this index. In the Dow Jones Industrial Average, stocks in the index that have a higher price are given greater weight.

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31. Finding a Broker

When an investor feels ready to invest in the stock market, they’re ready to select a stockbroker. First, decide whether to work with a full-service or discount broker. Full-service brokers provide advice and recommendations but charge higher fees. Discount brokers let their clients make their own decisions.

Most experts would recommend that a newcomer to the world of stock market investing should choose a full-service broker. If it’s not in their budget, investors can find a viable discount broker online. Typically brokers require a minimum balance to get started. Online brokers will ask for between $500 and $1,000.

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32. Picking Stocks

After hiring a stockbroker, it’s time to choose some stocks. The first thing to do is research several companies. There’s much information out there. Keep the investment goals simple and look for the companies that are appealing.

Read over a company’s annual report. You can also read a company’s annual letter to their shareholders to get a feel for their goals as a result. Other information needed like SEC filings and quarterly earnings reports, can be found through a broker.

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33. How Much Should I Invest?

Next, investors will need to determine how much money to invest. Contrary to what some may think, investors don’t need a ton of cash to make investments. Commissions on stock trading have reduced significantly in the past few years. It’s possible to buy the first stock for only a few hundred dollars due to that fact. 

There are quite a few brokers who will have a list of exchange-traded funds that are commission-free. That allows beginning investors to start investing for the cost of a single share. When investors think about a budget for investing, section it into segments: $100 a month, $500 a month, or $1,000 a month. Choose whichever amount of money works best for an individual’s budget. 

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34. Pay Off High-Interest Debt 

Before taking the plunge into stock investing, it’s vital to handle a few financial matters. One of the most important things to do is to pay off any high-interest that an investor may have. If the interest is 10 percent or higher, aim to pay it off as soon as possible.

The most common type of debt that has an interest rate higher than 10 percent is credit card debt. Having debt can take away from the money that could be earned through investing in the stock market. If someone has $10,000 in credit card debt with 10 percent interest, by the time they’re 70 years old, it could become $1,000,000! Please get rid of any credit card debt fast by transferring the debt to a low APR credit card or getting a personal loan to pay it off. 

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35. How Many Shares Should I Buy?

There’s no rhyme or reason to the number of shares an investor should buy. It all depends on what feels right for an investor and their finances. Investors can choose to buy a small number of shares or fill up an entire portfolio right off the bat. It’s wise to start small so they can get comfortable with being an individual stock owner.

If an investor can make it through rough patches without going too crazy, then they can advance to a fuller portfolio. Nothing says that it’s required to buy a huge chunk of stock on the first meeting with a stockbroker. Buy as many shares as feels comfortable with and how many fit within an investing budget.

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36. Market Orders

Market orders are used to order stocks. These have information on them, indicating that an investor is willing to buy or sell a share at the top current market price. It’s possible that the amount that is paid or received is not the same price that was quoted, even if the quote happened seconds or minutes before a market order is received.

That is because the bid and ask prices continuously fluctuate. Because of this, it’s best to use a market order when buying stocks that are steady and won’t experience huge price swings. Market orders work well for buy and hold investors that are focused on fully executing a worthwhile trade.

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37. Limit Orders

Limit orders are useful because they give investors a bit more control over the final price at which a trade is completed. Investors can set a specific number for a stock with their stockbroker that is in line with how they value a company. With a limit order, investors let their stockbroker know that they can only execute the order when the stock price falls to their set number.

Investors who buy and sell company stocks for smaller companies benefit significantly from limit orders. These types of orders work well during short periods of stock market volatility. They also are beneficial when stock prices become more essential than order fulfillment.

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38. Making Money with Stocks

There are two ways to make money with stocks. The first method is to buy stocks at a specific price and later sell them for a higher amount. Identify the price of shares at a particular company and how much money an investor has in the investment budget to determine how many shares to purchase.

Another way to earn money with stocks is to hold onto any shares while collecting dividends. Dividends are a piece of a company’s earnings that gets distributed to its shareholders. Dividends get paid out quarterly, even though companies are not at all required to pay them. Additionally, there are more complicated options like shorting shares to make money through stock investing.

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39. Learn the Terminology

Once an investor has decided it’s time to invest in the stock market, they’re almost ready to go. A good idea before contacting a stockbroker is to become familiar with the lingo. We’ve provided a head start with this article, but there are a few more terms that are essential to know.

The most important terms to know are ‘ask’ and ‘bid.’ Ask is the price that sellers will take for a stock. The bid is the price that buyers are good with paying for a stock. The spread is the difference between a stock’s highest bid price and the lowest ask price. Knowing about the market, limit, and stop-loss orders are also imperative.

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40. Start Buying Stocks

Now that we’ve outlined all that there is to know about the stock market and buying and selling stock, it’s time to start investing! Next, decide which types of companies are ideal for investing. Maybe an investor is a fan of electronics, cell phones, retail stores, or cosmetics brands.

Start small and invest in one or two companies. If an investor likes how their stocks look, they can add on a few more investments. Find a stockbroker that is likable and trustworthy enough to help with investing hard-earned money. Get ready for financial success investing in the stock market!

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