Understanding the Stock Market for Beginners!

Why is the stock market important for you? The simplest answer to that is that you can invest your money. Yes there are other routes to go when it comes to investing your money. But often times those routes do not pay adequate returns. That’s where investing in the stock market comes in. you can many a times get more than a good payout by dabbling in shares. But of course there’s always the possibility of losing all your money too. This is known as a risk return payoff. The higher the risk the higher the payout but also more the chances of losing all your investment. There are two types of investing- day trading (steer well away from this for now) and long term investing.

Understanding the Stock Market for Beginners:

In this post we’ll be taking you through an understanding the stock market for beginners.

Decide on the Type of Investor you are: 

Before we delve further into an understanding the stock market for beginners you need to know the type of investor you are. Whenever you open a brokerage account, which you have to by the way, they often ask you what your goals are and how much risk are you willing to bear.

Some investors are the put – my – money – in – and – forget - it kind of type while others want to take a more active participation in their investing. Most brokers allow you to invest in stocks, bonds, mutual funds, ETFs or exchange traded funds and index funds.

Knowing which Broker to Take: 

This will depend on your preferences and what each has to offer. But basically there are two types of brokers:

• Full Service brokers- they give you all things related to money management. These include retirement advice, healthcare, also where to invest your money in order to get adequate returns to meet your financial goals. Since they give you a big bang for your buck, they also charge a lot. These service providers are therefore mostly used by higher net worth clients. These costs include a percentage of your transactions, a percentage of your assets managed and even a yearly membership fee. The minimum ranges from account sizes of $25,000 and above.

• Discount brokers- this type of brokerage has become the most common nowadays. They have features where you can place the transaction you want and even a place where you can invest it and forget it feature too. Since they have become so popular they even have apps, graphs and many more features on their websites. As for cost, yes they do take a percentage of your transactions but the costs are relatively low as compared to the brokers up above.

There’s always the option of investing through your employer: 

If you don’t happen to have much laying about to invest then there’s always your employer’s retirement plan. These plans don’t require a lot of investment. In some cases it is as low as 1% of your salary. What’s even more great with this route of investing is that it is tax deductible. This means that before you calculate your tax payable from your income you can deduct this investment. Thus lowering your tax payable. Also with annual increases you can even add to your contributions later on too.

Minimum Deposit requirements when it comes to understanding the stock market for beginners: 

Many brokers or financial institutions have a requirement of a minimum deposit. This means they won’t accept your investment if you don’t invest a certain amount. This amount varies from firm to firm. The best advice we can give in this regard is to look around. Check your brokers available for the amount of commissions they charge, what their reviews are and so forth.

In some cases a deposit is not even charged while in others if you commit a higher amount to investing then they waive off a portion of their management fees and trade costs. Some also offer commission free- trades for initial trades when you open an account.

Now Coming to Commissions and fees: 

When it comes to understanding the stock market for beginners, you need to first understand that nothing comes free. This goes for brokers too. Although you don’t need to pay much when it comes to investing with brokers, the fact is that something is still chargeable.

In many cases your broker will charge you an amount for every trade you make. This can range anywhere from $2 to $10 per trade. Still other brokers may not charge you for trades, believe me they make up for it in other ways. That’s where the fine print comes in handy.

Whenever and however you trade you need to keep this in mind. Ultimately it will have a bearing on your profit margins. In more practical terms if you’re an active investor and like to frequently buy and sell stocks, with every transaction there are trade fees to pay. This eats into your profits margins leaving you with little or in some cases nothing. A trade is considered to be buying or selling stocks in a company. Note the “a company” here. If you happen to buy stocks of three different companies at the same time, it is considered as three different trades.

Mutual Fund Fees: 

If you happen to like mutual funds you also need to know that there are additional costs when it comes to this form of investing too. Besides the normal trade fees you even have management expense ratio or MER for short. But more on this later.

First of all what are mutual funds. Mutual funds are basically a pool of stocks from various companies. As they say never put all you money into one basket of eggs. The same is applicable here as well. In the stock market you never want to put all your money into one company. Mutual funds help in diversifying the risks. Now to MER, these are fees where the management charges a percentage normally ranging from 0.05% to 0.7% of the assets in the fund.

There is much more to understanding the stock market for beginners. A lot of reading and learning is required before you put you hard earned money anywhere.