Every Investor Should Know About This…
We’ve covered a lot of big topics recently which should allow you to begin to explore new investments and broaden your understanding of how the market works. But all that information is useless if your foundational understanding of the stock market is garbage.
I want to take time to review some of the core concepts in investing that EVERY trader needs to know, no matter where you are in your trading journey.
To some of you who have been trading for a long time, you might find some of the material to be review.
Read it anyway.
It never hurts to go over the basics again. You might find that you have forgotten something, or rediscover a method that you hadn’t considered. Getting comfortable with trading or stuck in a rut is a recipe for disaster.
You need to constantly work at making sure you are sharp and on your game.
If you haven’t been trading for a long time, this will be an invaluable resource for you that will set you up for a good foundation from which to build your trading knowledge and tools.
Let’s get started.
What is Investing?
Investing involves giving another person or entity your money in exchange for a share of profits. Of course, profits are never guaranteed, so you can also lose money on investments.
For instance, let’s say your friend wants to start a restaurant. He or she asks you for a $20,000 investment to secure a location, buy equipment, and so on.
Your buddy starts the restaurant and fails. The business tanks. You lose your investment because there was no profit to be gained.
But let’s say that person sold you a 10 percent stake in the restaurant for your $20,000 and the restaurant earned $500,000 in profit during its first year. In that case, your investment was a clear success.
Investing in Stocks
In the stock market, you buy shares (pieces) of companies based on their stock prices. You can then sell your shares for a profit if and when the stock price goes up.
Many investors — including myself — also short stocks. This involves borrowing shares of stocks you think will fall below the current price point, then selling the stock and profiting.
Penny stocks are stocks that trade for less than $5 per share. That’s where I’ve focused most of my career. Stocks are primarily defined by market capitalization — small cap, mid-cap, and large-cap stocks are distinguished by their value.
Investing in Fixed-Income Securities (Bonds)
While the stock market involves investing in shares of a company, which constitutes equity, bonds are all about debt. The company or municipality issues a bond to raise money and agrees to pay a specific amount of interest on that debt to anyone who invests.
Bonds tend to provide a lower return on investment, but they’re great when you need income and you have a low risk tolerance. While high-risk bonds exist, most pay back the entire principal to investors — in addition to the interest, of course.
Investing in Real Estate
I don’t invest in real estate, but it can be an excellent way to grow your wealth over time. It’s a diverse area of finance because you can invest in real estate for multiple purposes. For instance, you might “flip” a property after buying in cheap and fixing it up, or you could become a landlord and collect rent.
Investing in Options
Options trading is similar to regular stock market trading except you’re buying the option to purchase stock by a specific date. You can choose not to buy the stock and lose only the money you paid up front, or you can buy the stocks to turn a profit.
Investing Guide for Beginners
If you’re just getting started in the stock market or other securities, researching investing for beginners will give you the best chance of success. You don’t need a ton of upfront cash or a degree in finance, but you must study the stock market and learn how to evaluate stocks effectively.
How to Invest with Little Money
If you don’t have much money, look into online brokers (like TD Ameritrade or E-Trade.) You can start an account with between $0 and $500, then start trading.
But don’t risk all your money on one play even if you’re starting with a small account. Practice with tiny investments at first so you get comfortable with the process and rhythm of trading.
How to Invest in Penny Stocks
As mentioned above, penny stocks trade for less than $5 per share. You can invest in penny stocks through the pink sheets or, as I recommend, the Over-the-Counter Bulletin Board. Learn to recognize and follow chart patterns so you can profit off these small, sometimes struggling companies.
How to Identify the Best Long-Term Investments for Beginners
If you’re interested in long-term investments, consider your risk tolerance as well as the types of securities that excite you most. For instance, you might want to invest in blue-chip stocks, take your dividends, and cash out when you reach a specific point in your life, such as retirement.
Real estate, bonds, and mutual funds can also constitute excellent long-term investments. Before you start, though, educate yourself on the market so you don’t take unnecessary risks.
How to Identify Retirement Investing Opportunities for Beginners
Meeting with a financial planner or advisor can prove useful if you want to build a retirement portfolio. They’re extremely knowledgeable about IRAs, 401(k)s, and other investment vehicles.
The Bottom Line
There are a lot of different types of investments out there, and as a new investor it can be tricky to figure out what sort of investing you want to do.
Not every type of investment is something that you need to take part in. As I said, I don’t invest in real estate, but that doesn’t mean that it isn’t a legitimate, and potentially very lucrative, form of investment.
So do your homework, figure out what sort of trading interests you, and dig into the research for it!
Later, I’m going to cover 13 basic rules that every investor must obey if they want to be successful. Stay tuned!
— Tim Sykes
Editor, Penny Stock Millionaires