A Teen Trader is an educational Site Only. The contents included in this website is not investment advice and are not meant to be taken as investment advice. Risk what you can afford to lose.
Introduction: I’ve got plenty of questions about stocks and I feel that because I have covered the overall understanding of forex very well, I will begin helping people to understand different world markets starting with stocks. Stocks are awesome, I am biased however, as the first thing I ever traded was AAPL (Apple, Inc.), but none the less the stock market is great. There are so many different ways one can approach the stock market to attempt to create profits, which makes it so ideal. You can make diversified portfolios for longterm gains, you can have a dividend driven portfolio, you can day trade, you can invest in or trade ETFs, you can buy individual companies, you can bet against companies, and more. In this first blog post (and YouTube video) I’m just going to get into the basics of stocks from the bottom up.
What are Stocks?
Firstly, what even is a stock? Buying a stock is essentially buying a small ownership percentage in a company, also called shares. There are two types of stocks, common stocks and preferred stocks, you will likely be trading common stocks but preferred stock allow for investors to receive their dividends before common stockholders and preferred stock will be paid off before common stock in the instance of a bankruptcy. Owning a share of a company allows you to capitalize on the growth of the company and gain dividends.
What is a Dividend?
A dividend is a payment to investors that is like a “thank you” for investing in the company. Dividends are typically issued quarterly, but some ETFs or companies may do it monthly or semi-annually. When investing, dividends are what allow for continuous compound growth as you are able to reinvest those dividends with no broker transaction fees. If you do not wish to reinvest your dividends, you can not enroll in dividend re-investment and rather just take the cash. If your portfolio is big enough or if you have high dividends yielding companies, you could easily use your dividends to cover certain living expenses or use for travel, etc.
Why do Companies go public?
Companies go public and issue common stocks (for everyday investors to buy) in order to raise capital. Companies request to be listed on the NYSE or NASDAQ or other exchanges and issue a certain number of shares to the public, which will then begin trading as different ticker symbols. Ticker symbols are an (up to) 4 letter identification code for listed companies, to help investors find the appropriate company to invest in. These companies will then use that raised capital to buy new warehouses, or invest in new technology, or expand their business in other ways. This allows the company to create more revenue and more profit, which will then create an appreciation in the value of the stock, benefit those investors. This occurs because now that this company is generating more revenue, profits, growth and is now viewed as more valuable to the investors.
What causes stocks to go up or down?
As I briefly discussed in the last section, stocks appreciate generally based on expected future growth, overall economic outlooks, and supply and demand. As confidence in the overall markets increase, say a positive outlook on GDP and other major data occurs, stocks as a whole will appreciate because that is typically driven by overall increased revenues by large corporations. When say, unemployment drops and employment rises, stocks will typically rise, why? As more jobs are created that allows for more people to be borrowing more and spending more, which goes back into the companies.
Just like we discuss in forex, stocks move based off of supply and demand zones (or support and resistance zones) this are zones created by the market indicating that prices are too high for the expected future growth of the company, and the opposite with demand zones.
Future growth of a company is (outside of overall market conditions) the key driver in which stocks will rise over time and which won’t. This is because companies that are consistently profitable and consistently grow will continue to attract investors because those investors know that XYZ Corp is a fundamentally sound company.
Things to Know before trading/investing in stocks
- Your account must be greater than $25,000 if you wish to day trade 3+ times within 5 trading days.
- You may borrow up to 4x your money, but you will incur daily interest fees (charged to your account monthly, call your broker to see what your fees are)
- Stocks do gap, as there is premarket trading (trading before 9:30 am est) and aftermarkets trading (from 4:31 pm est to ~8).
- During premarket hours and after market hours you CAN trade, but spreads will likely be higher.
All in all, stocks are a great way to store wealth, capitalize on the companies you love, and grow your money. Stocks return, on average 7% every single year which can allow you to double your money ever ~10.28 years (not including dividends).