Investing in the stock market can be a great idea if you know what you’re doing. But if you aren’t well-versed in the basics of stock trading, you’ll find it hard to make any money. Before investing, learn about the 10 following things you absolutely need to know about stocks.
1. Buying Stocks Means You Own a Tiny Part of the Company
Buying stocks is a great way to use investing money to get good returns, but it’s also an easy way to own a portion of a company. However, you only own a tiny part, which means you can’t walk in corporate headquarters like you own the place. You also can’t make executive decisions.
2. The Trick to Stocks Isn’t to “Buy Low, Sell High”
While it’s true you’ll only get a return on your stock investment if you buy low and sell high, there’s no guarantee any stock will be profitable. The trick to stocks is actually “there’s no such thing as a sure thing.” However, long-term investments are usually safer for your portfolio.
3. Short Term Trading is a Losing Game; Stick to Long Term
Unless you’re an investment wiz, short-term trading is a bad idea. Short-term trading sets its stock prices based on quarterly earnings reports and economic data, which are unreliable. The bigger opportunities come from steady, long stream profit reports you can track over time.
4. Study SEC Reports Like it’s Your Full-Time Job
No one has a sixth sense for trading, but there’s a way you can find great companies to invest in. The annual 10-K, which features quarterly and yearly financial numbers, is publicly available through SEC's website. This document can offer insight on what companies to invest in.
5. Dividend-Paying Stocks Can Help You Insulate From Declines
Seeing your stock go down in price is scary, but you have less to worry about when you invest in dividend-paying stocks. While dividend-paying stocks don’t prevent declines, they soften the blow because shareholders want to ensure that their company’s stock doesn’t fall too low.
6. Don’t Determine a Stock’s Worth Based on its Buy-In Price
Overnight, the Beyond Meat stock shot up 840%. The same thing happened with LaCroix. Successful companies, like Airbnb, have never turned a profit despite their high-cost stock. A company can have a lot of investors, but if a company isn’t profiting, its stock is bound to tank.
7. There’s No Metric That Separates a “Good” or “Bad” Stock
Can you determine a good stock based on its measure of growth? The answer is “no,” regardless of what anyone tells you. There’s no single data point that divides a good stock from a bad one. It’s better to pay attention to a company's overall earnings, not their profit margins.
8. Be Mindful of High Taxes That May Decrease Your Returns
Another reason to invest in the long-term is taxes. If you invest in a stock for less than a year and sell it, that triggers a short-term capital gains tax. That means the item or service is taxed as ordinary income. That means you could lose 25-40% of your earnings by selling too early.
9. Don’t Base Your Investment Decisions on Market News
We can’t predict the stock market with 100% accuracy no matter how hard we try. But people still try. Making quick decisions, especially when you’re taking your advice from foreign markets, will inevitably leave you in the red. Take market news as entertainment and nothing more.
10. You Probably Don’t Need A Stock Broker
If you’re scratching your head at this point, you’re not alone. Even stockbrokers can’t predict the market consistently. A stockbroker is more like a guide who has more knowledge about the stock market than a regular Joe. You don’t need a stockbroker if you educate yourself.