You want to get started trading in the stock market, but you are unsure of what to trade and how to know a good deal from a bad one. How do you know what companies or stocks to trade? These are great question and the perfect place to start.
Before choosing a company to trade, you must first understand a stock. A stock is an individual share or piece of ownership of a company. When you purchase a stock, you are purchasing part ownership in that company, and you are then called a “stockholder” because you own part of that company.
The main benefit of owning shares or stocks in a company is the stock you own holds monetary value. If the value of the company rises, then the value of those stocks rises. You could then sell your share of the company for more than you paid and end up with a profit.
Another benefit to owning stock in a company is dividends. Dividends are periodic profit payouts which is distributed to owners. Not all companies will do this, but if you own stock in one that does, you will get a portion of that profit distribution provided the company has had a profitable term.
There are two types of companies, public and private, and they all have stocks. However, not all stocks are for sale.
Selling shares publicly brings cash into a company. It helps them raise capital and offload risk from their initial investors. Giving shares as compensation is also an alternative way to pay their employees, which cuts down on cash spent on labor. Lastly, selling stocks also offers outsiders the opportunity to take part in the business.
Today, around 4,000 - 5,000 companies in the United States are publicly traded. This number fluctuates because sometimes public companies doing well will decide to buy all of their stocks back from their stockholders and transition back into a private organization. Also, some private companies looking to raise capital may decide to become public.
Where you buy your stocks is completely up to you and depends on what you are interested in buying.
In the US, the Major Exchange options are:
Internationally, provided you are dealing with an internationally able broker, some of the primary options are the Tokyo Stock Exchange, the London Stock Exchange, Hong Kong, Toronto, etc.
Choosing the companies, you trade is ultimately a personal preference. A good starting point is to trade companies you believe and support. You should investigate companies you like because by owning a portion of a company’s stocks, you are a part of that company. Buy and support what you believe.
Two other factors to consider when choosing a company to trade are trending and volume. We will discuss trending more later, but volume is a key identifier. The volume of trades happening in any company shows the fluidity of the market for that stock. The best picks for trading in our opinion are companies trading over one million daily shares.
Over The Counter stocks, or OTC, are often called penny stocks or pink sheets. These are usually too cheap to trade through the major exchanges. You are, of course, free to trade any stocks you like. However, we stay away from these because they are not well regulated and tend to be much riskier and more volatile than the regulated stocks.
Also, to trade any stock, you need to know the ticker. A Ticker Symbol is an identifying set of letters for any company in the market. The ticker symbol tells the exchange which stocks you are buying or selling. Tickers are anywhere from 1 - 5 letters, and your broker can help you look these up.
Continue to follow this blog series for more stock market basics, and if you are ready to dive in deeper, check out our course Get Started Trading in 7 Days.