I am not a stocks guru. I'm just learing myself and sharing my wealth i.e. knowledge to help everyone be on the same page. I won't assume that you know anything about stocks.
- To begin, you may ask yourself, "Why does anyone invest in stocks?"
Well, my answer would be "To make money. Simple! Yes, I know there are other ways to make money so do what makes you money."
- There's a myth around the fact that you should "invest in stocks and NOT trade as trading is bad"
Ok, investing means you hold the stock for a longer period of time whereas in trading you may buy and sell within weeks or a few months. I personally don't believe in this myth because whatever makes you money. Everyone is different. If someone asks me what I do - I do everything - I invest, I trade and I also speculate. Speculation means investing or trading stocks that have a potential to go up or down substantially based on some catalyst. Lets go back to Chemistry classes where catalyst meant a chemical used to increase the reaction rate of the process. In case of stocks, a catalyst means an event or news that may help fluctuate the stock price either up or down. More on speculation later.
- You may ask "How do I pick the stock that I should buy"
You know what, I'd be buying that stock if I knew. To this I say you have to find your criteria that you use to buy stocks and use that to pick them. I will discuss my criteria later on. Its not a "one size fits all" kinda deal though - sometimes you have to look at the bigger picture which is more important than your criteria.
- You may ask "Why stocks? How do they compare to bonds? Why not bonds?"
I suggest you do some research on bonds and find your cup of tea. Once again, whatever makes you money.
These were some questions that were most frequently asked so I decided to get them done with before we started.
Rules that come from Common Sense in Life
* Learn from your mistakes. I bet you do this in your everyday life.
* There's a populat saying: "Past performance does not guarantee future results" so don't think that if you made money in a short period of time before, you'll make it again or if you lost money before, you'll lose it all again. Stock investment is compared to gambling by some - to that I say Ridiculous. However, there are some people who do invest like gamblers without doing their Due Diligence (DD as its called in the stock world). You'll hear people say this a lot "Do your own DD". Someone may tell you someday "I make a lot of money in stocks. Right now I own ###. Be careful. Don't take action based on other's past performance. Also, do your own DD.
* If you're the shopping kind, some items are cheap whereas others are expensive. Mostly, the expensive items are either expensive because they're better quality or because the demand is more than the supply. You also know that if and when you want to sell your item, the expensive one will mostly hold a better re-sale value. (Note that I used the word mostly as you can find exceptions but I'm talking in general). The same applies to stock. High quality stocks are usually not penny stocks. On the other hand, penny stocks are risky as their resale value is low (there may not be enough demand).
* You must have heard the saying "Don't put all your eggs in one basket" because if you do and that basket falls, you may lose all your eggs and may not get any food that day, hypothetically speaking. In stocks, you HAVE to diversify your portfolio.
Commonly Used Terms
1. PE Ratio or Price to Earnings Ratio
What is PE ratio? It is a means to determine how expensive a stock is e.g. lets say stock of $$$ company was trading at 50 dollars. Company decides to do a split, which means they will give 2 shares of 25 dollars each for every one share to every stockholder. Thus, these stock splits can bring the actual price of the stock down to whatever the company wants. Therefore, there has to be a way to compare two stocks. Thus, we use PE ratio. You divide the stock price with the amount earned per share in the previous year to get the PE ratio. If you have two companies, one trades at PE ratio of 5 and the other at 8, you know the 8 one is expensive.
2. Bid and Ask
When you go grocery shopping, you buy bread. The market sells bread to you. However, at Wall Street, you bid for stocks and the person who wants to sell, puts an ask price for his share(s). If you've ever seen or heard about an auction, people bid for items there. The highest bidder gets the item. At Wall Street, the people who want to sell are putting an ask price and people who want to buy are putting a bid. The stock itself is at a certain price that is decided by the bids, asks and shares matched. If your bid matches an ask at the current stock price leve, you get the stocks you wanted to buy. Little tricky to explain but rather than saying buy and sell, we say bid and ask.
3. Level II Quotes
NASDAQ, a market where shares are traded via computers, you could see the current bids and asks that are closest to current share price in real time. This is seen via the Level II Streamer.
