If you aren't familiar with the basics of the stock market, the media's stock trading information can be confusing.
Terms like “earnings movers” and “intraday highs” mean little or nothing to the average investor. In the long run, you need to know what these phrases imply or why the bottom of your TV screen flashes red or green.
To learn how to trade stocks, you must first understand the stock market and its workings.
Exchanges like the New York Stock Exchange and the NASDAQ make up the stock market. Stocks are listed on an exchange, which connects buyers and sellers and serves as a market for their shares. The exchange tracks each stock's supply and demand, and thus price.
Individual traders are often represented by brokers. Your stock trades are routed through the broker, who then talks with the exchange on your behalf.
The NYSE and NASDAQ are open from 9:30 a.m. to 4:00 pm eastern time, with premarket and after-hours trading sessions available depending on your broker.
When individuals talk about the stock market rising or falling, they're usually talking about one of the major market indexes.
A market index measures the performance of a set of stocks that can represent the market as a whole or a specific sector of the market, such as technology or retail firms. You're most likely to hear about the S&P 500, the NASDAQ composite, and the Dow Jones Industrial Average; these are frequently used as indicators for overall market performance.
Indexes are used by investors to compare the performance of their portfolios and, in some situations, to make stock trading decisions. Index funds and exchange-traded funds, or ETFs, which monitor a single index or market sector, can also be used to invest in an entire index.
Most investors would be wise to construct a diversified portfolio of equities or stock index funds and keep onto it through good and bad times. Stock trading, on the other hand, is popular with investors who prefer a little more action. Stock trading entails routinely purchasing and selling stocks in an attempt to time the market.
The purpose of stock traders is to profit from short-term market occurrences by selling or buying equities at a low price. Some stock traders are day traders, meaning they purchase and sell multiple times during the day. Others are merely busy traders who execute a dozen or more trades per month.
Investors who trade stocks conduct significant research, frequently dedicating hours per day to analyzing markets. They focus on technical stock analysis, which involves employing tools to analyze a stock's movement in order to identify trading opportunities and patterns. There are many internet brokerages also that provide stock trading information, such as analyst reports, stock research, and charting tools.
An animal you don’t want to come across on a hike, yet the market has chosen the bear as the actual symbol of fear: A bear market occurs when stock prices decline — criteria vary, but often by 20% or more — across multiple of the indexes mentioned previously.
Bull markets are followed by bear markets, and both frequently signify the beginning of wider economic patterns. In other words, a bull market often shows that investors are confident, implying economic expansion. A bear market signals that investors are retreating, indicating that the economy may do the same.
A relieving point is that the average bull market outlasts the average bear market, which means that investing in stocks can help you grow your money over time.
When dividends are reinvested and inflation is taken into account, the S&P 500, which includes 500 of the largest stocks in the United States, has traditionally returned roughly 7% each year. That means that if you had put $1,000 about 30 years ago, you would have around $7,600 now.
A stock market correction is a state where the stock market falls by 10% or more. A stock market crash is a quick, severe drop in stock values, such as in early 2020, near the start of the COVID-19 pandemic.
While collapses can signal the start of a bear market, keep in mind that most bull markets endure longer than bear markets, implying that stock markets tend to gain in value over time.
If you want to avoid crashes, think about the long term. When the stock market falls, it can be difficult to watch the value of your portfolio dwindle in real-time while doing nothing.
However, doing nothing is often the wisest course of action when investing for the long run.
Why? Because selling investments during a slump locks in your losses. If you want to re-enter the market at a more favorable period, you will almost definitely pay more for the privilege and forego a portion (if not all) of the rebound gains.
As an investor, you can't avoid bear markets. What you can avoid is the danger that an undiversified portfolio entails.
Diversification protects your portfolio from inevitable market downturns. If you put all of your money into one company, you're betting on a speedy success that could be derailed by regulatory hurdles, poor management, or an E. coli outbreak.
Investors diversify to smooth out that company-specific risk by grouping different sorts of stocks together, balancing out the inevitable losers, and decreasing the possibility that one company's contaminated meat will wipe out your entire portfolio.
Building a diverse portfolio of individual companies, on the other hand, requires a significant amount of time, patience, and research. A mutual fund, the previously mentioned exchange-traded fund, or an index fund are further options. These hold a portfolio of investments, so you're already diversified. An S&P 500 index fund, for example, would seek to replicate the performance of the S&P 500 by investing in the 500 firms that comprise the index.
The good news is that you can mix individual stocks and mutual funds into a single portfolio. One recommendation is to allocate 10% or less of your portfolio to a few stocks in which you have faith, and the balance to index funds.