Beginner Stock Market Investing Guide

Most of the things I know about stock market investing, I learned by reading various resources online.

The internet has a lot of them, but I know, from experience, they can be quite hard to understand specially if you’re a beginner.

That’s why I’m now writing for you this straightforward, no nonsense explanation of how the stock market works and how you make or lose money from it.

Are you ready?

Almost a year ago, I tried to explain how the stock market works to a 12-year old. If you haven’t read those posts yet, then I urge you to go there now. Yes, it’s mandatory that you read them first.

• Explaining the Stock Market to a 12-year Old Part 1
• Explaining the Stock Market to a 12-year Old Part 2

So now, you know what the stock market is and why it exists. Now, how do you make money? The two most basic ways are:

1. Getting dividends
   • When the company makes money, they may choose to share the income to those who own their stocks.
   • Dividends can be in the form of cash or additional stocks.
2. Selling the stock shares you bought at a higher price
   • This is the concept of “buying low and selling high”.
   • Last December 2009, Jollibee (JFC) was selling at P53 per share. This November 2010, the price is around P90. If I bought JFC shares last year and sold it yesterday, my money would have grown by more than 69% in less than a year!

How do you lose money in the stock market? The most basic reason why people lose money is:

• They sold their shares at a price lower than they bought it.
  • Last October 26, you bought shares of Cebu Pacific (CEB) at P132 per share. Then last November 15, a financial emergency came up and you needed money. You have no savings and no one to borrow money from, so you sold your shares. At that time, CEB was selling at only around P125. You effectively lost around 5% of your money.
  • Stock prices go up and down and there’s no absolute way to know when it will do so. When a stock price goes down, it can take days, weeks, months and even years before it goes up again.

So what makes the stock prices go up or go down? To make things simple enough for you to understand, I’ll say it’s because of one basic reason – people’s emotions.

• The stock price goes up when people wants to buy them.
  • Business is doing good for the company;
  • … and many other factors
• The stock price goes down when people wants to sell them.
  • Economy is doing bad and people need money;
  • … and many other factors

Are there ways to know when a stock price will go up or go down? Yes, but they’re not always reliable. You can choose either one, or both ways.

• Fundamental Analysis
  • Studying the company’s financial conditions, future plans, etc.
  • Learning about economic and industry conditions of the country.
  • … and many other factors
• Technical Analysis
  • Evaluating the value of the stock prices, trading volume, etc.
  • Identifying trends in the price charts to determine direction
  • … and many other factors

I tried to make everything as simple as possible and I hope I was able to give you a good understanding of how the stock market works as an investment. If you have any questions, do ask them below.

Do note however that these facts are just the tip of the iceberg and to fully understand the stock market – one will need to dedicate time to learn them.

But the good news is, it’s not as hard as it seems to be unless you’re planning to make a career out of being a stock broker or you’re a rich tycoon who wants to buy and sell companies.

That means as an investor, having the basic knowledge on business, finance and economics will already help you a lot in making the most out of your stock market investments.

This article is part of the series, How To Invest in the Stock Market. Be sure to continue your learning by subscribing to Ready To Be Rich.

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Photo credits: scion_cho and DonnaGrayson