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A SHORT GUIDE TO INVESTING

Now, this page is what you really came for! In this guide, we will review the following aspects:

 

  1. What is the stock market and how does it work?

  2. How can you make money by investing in stocks?

  3. How to read a Stock Quote 

  4. How to read a Candlestick Chart

  5. How to pick a good stock 

  6. My "10 golden rules" for investing successfully in the stock market

  7. Conclusion

What is the stock market and how does it work?

In simple words, it is a place where shares of public listed companies are traded. Thus, it allows people to buy and sell their shares of companies for money. The price of these shares depends on a lot of things such as:

  • Supply and demand: If there are more people buying a stock than people selling it (high demand & low supply), the stock price goes up with the demand. If more people are selling than there are people buying a stock (high supply & low demand), that’s a sign that the company is unfavorable to own and the stock price drops (however, it could be interesting to own at the new, lower price level as it could be undervalued for example).

  • Inflation

  • Deflation

  • Economic and political events

  • Changes in the value of a currency

The stock market exists so that companies can raise money without having to take on debt. Companies provide shares of their company to the public in what is known as an Initial Public Offering (IPO). When a company sells shares, this means that they cut up the company into millions of (figuratively speaking) pieces. These little pieces of the company, known as stocks, are sold. Therefore, when someone owns a stock, they own a little piece of the company. That also means that the owner of the stock is exposed to the underlying dynamics of the company (earnings changes, competition dynamics, etc.), and these dynamics will drive share price changes. If the company grows and makes money, people that own stocks of the company make money too. In addition, stocks can increase in value, which is called capital appreciation. It is important to note that a stock is not the same as a share. When you own more than one share in a company, these are called stocks. So a stock is a combination of several shares from a company. But in what platform does all of this happen? 

This can happen in both physical and virtual sites known as stock exchanges. A stock exchange is where investors trade their shares of companies to one another. That’s why stock prices are constantly changing (law of supply and demand as explored before)! In the U.S., the best stock exchanges are the New York Stock Exchange (NYSE), the NASDAQ, and the American Stock Exchange (AMEX). NASDAQ is known for technological companies. Most of the tech stocks out there trade on the NASDAQ stock exchange. On the other hand, NYSE is known for having blue chip stocks, making it less volatile than NASDAQ (Jeff Desjardins, 2017). Another platform is the Electronic Communication Network (ECN), which connects traders and brokers over the internet instead of on the trading floor. Nevertheless, a stock exchange is not the only place where you can invest in. 

Index funds:

An index fund consists of a basket of stocks that are averaged to indicate the overall performance of the market. So when someone says, "the stock market went up/down this month," it's most likely that they are referring to an index fund. However, if you only own stocks in one or two companies (which I do not recommend!), the performance of an index fund will not describe your stocks' performance. Instead, it would give you a sense of the atmosphere in the stock market and possibly be a warning signal. 

Some of the most known index funds are the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500. Nevertheless, they have some differences. The Dow contains only 30 of the largest, most significant U.S. stocks. On the other hand, the S&P 500 (short for the Standard and Poor's 500) contains 500 large companies as its name implies, thus offering a broad diversification of stocks. The Nasdaq Composite offers mostly tech companies and some slightly smaller companies. Most people are aware of the Dow, but investors focus more on the S&P 500, which is gaining a lot of attention and a good reputation worldwide.

By investing in an index fund, you practically own a stock from almost every major sector of the country's economy. As a result, investing in an index fund is way easier than picking each stock individually as done in a stock exchange. Moreover, when buying stocks individually, you must pay a commision for each purchase or sale. The same applies to an index fund,  but the commision fee is lower and more favorable. However, this does not ensure endless profit and protection against losses!

How can you make money by investing in stocks?

There are two main ways in which you can make money through stocks:

  1. Capital gain: This refers to profit from selling a stock (or other capital assets such as a bond too) due to an increase in share price. Thus, the purchase price of your shares is lower than the sale price, resulting in profit. For example, as I'm writing this, Apple's (AAPL) stock can be purchased on the NASDAQ exchange for $175 per share. If you bought a share from Apple right now and the purchase price increases to $190, you could sell it to make a profit of $15 ($190 - 175). Over the long-term, an increase in share price might be because the company's earnings have increased as a result of improvements and expansion. 

  2. Dividends: Many public companies pay out a quarterly or yearly dividend to the owners of their stock. They do this in order to share a portion of their profits with their investors. Sort of like a "thanks for believing in us" gift. It's not uncommon to make 2%-5% per year on an investment in a stock just by collecting dividend payments. You can use this "extra" money to reinvest in other stocks or for whatever you see best. Dividend stocks pay you even when the share price goes down! However, not all companies pay dividends, so this is important to consider when choosing a stock. In addition, not all dividend stocks guarantee a successful investment, there are several non-dividend stocks such as Warren Buffett's Berkshire Hathaway that are still good investments. 

Both of these combined represent something known as an investment's total return.

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But how can you choose a stock that will make you this profit?  We must first learn how to read a stock quote.

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