You may be attracted to the stock market by seeing the high returns it can give investors. The returns may have fascinated you to learn to invest in stocks. Before we talk more about how to learn to pick stocks, there is a lot more you need to know. It is like learning to drive a car. Before you actually sit and start to learn to drive, you need to know about the car and its functionalities.
Understanding the Risk
The first thing is to understand the risk. There are many financial instruments available in the market. The equation is simple – the higher the return, the higher the risk. When it comes to stock investment, the risk is on the higher side, and so is the return. The first thing you need to learn before you invest is the risk. When we say there is a risk, it does not mean you will lose your money. All it means is that the chance of losing money is higher.
However, if you take small steps, and understand the investment process, you can reduce the risk. Once you know the risk and the reward, you can move on to the next step.
Should You Be An Investor or a Trader?
Now that you understand the risk associated with driving the car, we can move to the next step.
Before you start picking stocks, it is essential to know the reason why you are doing it. Have a clear mindset – whether you are picking stocks for investing or for trading. What is the difference?
Investing is generally about the long term. You pick stocks that you believe will give you good returns in the long run. Trading, on the other hand, is about short-term. It could be a few months to as small as a few hours. To put money in the market to gain in a quick time.
The parameters to select stocks in both these cases are completely different. Hence, you should be clear about the reason. Most people mix both and they suffer losses since they are confused most time. They may pick the right stock, but then the approach may be wrong.
The problem most new investors face in equity investment is that there are more than 5000 companies listed on the exchanges. The first obvious question in front of them is to know which stocks to buy and sell. Before you learn to pick stocks for buying and selling, you will need to have some basic understanding. Here are the few things you need to learn:
- About the equity market – The equity market is completely different from traditional investing in fixed deposits and debt instruments. You should have some level of understanding of how the market works. You should know different sectors, market capitalization, etc before you learn about the stocks.
- Types of stocks – As mentioned above, there are over 5000 stocks listed. They are divided into different categories depending on the market capitalization – small, mid, and large-cap. You should know about these categories and the stocks in each category.
- Parameters and technical terms – When it comes to stock selection there are many parameters you need to know. For example, you should know about different ratios, how to read a company’s balance sheet, and so on.
The Learning Process
In the above section, we have talked about things you need to learn. The next important question is how you can learn about these and eventually buy and sell stocks:
- Pick a book – There are many books available in the market that teach you the basics of stocks. If you are completely new, just don’t get into buying stocks. Pick a book that can help you learn the above topics. Pick a book written by an author from your country and the examples covered are from your country.
- Watch some videos – In today’s time, there are so many videos available that can help you learn about stocks. Subscribe to some good channels and make the concepts clearer.
- Take an online course – If you are really passionate about learning, it is always better to enroll in a course. The problem with free videos is that they are not structured. They are good to learn the concepts, but step-by-step learning only happens when you enroll in a course. There are thousands, of course, available in the market. A good course will ensure you will learn how to buy and sell stocks in step by step manner.
- Start with a dummy account – Once you are comfortable and confident that you know the basics of the stock market, start by investing through a dummy account. Monitor your selection for a few months and then jump into buying stocks.
How to Filter Stocks?
Does a question still remain about what kind of stocks one should pick? To narrow down your research, you should know more about yourself – what kind of investor you are. At a high level, there are three types of investors – aggressive, moderate, and conservative.
It is basically your risk profile. If you are a conservative investor, it means you should avoid investing in high-risk stocks (small and mid-cap stocks). Similarly, if you are an aggressive investor, you can invest in the all-stock category. There are many online tools available to know the risk profile. An important thing you should do is figure out your risk profile, and based on that, shortlist the stocks.
Before We Go
We would like to mention that buying and selling stocks is also about the right mindset. The number one reason investors don’t make money in the stock market is that they are not disciplined, and emotions govern their investment decisions. Hence, we would suggest you work on developing the right mindset along with the learning process. You can read books to understand the mindset of a successful investor.
Small amounts of money can be invested if you’re just starting out. The choice of investment is more complex than just deciding which investment to make, which is challenging enough in itself. You have to be aware of the limitations that come along with being a new investor.
We hope you now know what steps need to be taken to learn to buy and sell stocks. Now learn about the Elliott wave theory.
Pooja Shah is a Content Writer at Financesage. It is a blog where I cover financial tips related to websites that are working for investors to make better financial decisions and make the best choices while buying financial things and for better economic life.