I started out 7 years back, wandering around for information on trading. I was totally clueless.
With so much information on the Internet and not knowing where to start, I was left overwhelmed. You won’t have to go through what I’ve experienced as I’ll be guiding you.
What is a Stock Market?
A stock market is a place where people buy and sell shares of listed companies.
Most companies get listed to fund their expansion, thus they place a portion of their company’s shares on the stock market for sale. When a company is first listed, the shares are known as IPO (Initial Public Offering).
You become a shareholder of the company if you purchase its shares (any number of shares).
When the company gives out dividends, they are distributing part of their earnings to their shareholders (you).
If the company’s business performs well, the price of its shares SHOULD rise as the company is now worth more per share. Why?
Imagine you own a listed company and have 100 shares available for sale in the stock market, each share is currently $10. Your company is worth $1000.
If business is good and the company earns another $1000, your company is now worth $2000. Given that the number of shares available for sale is the same (at 1000), each share should now be $20 a piece.
If the share price of your company is less than $20 on the stock market, the astute investor will buy your company’s shares as it is deemed to be cheaper. What a bargain!
Scenario 1: If he purchases all 1000 shares, he will own your company. This is rare unless you are a large investor.
Scenario 2: The public realizes the cheap share price (as the what the investor had spotted) and starts to buy it as well. This cause the prices to rise to $2 or more as some of them EXPECT prices to rise further in future because your company is earning money! Think demand and supply.
Yes, the key word is EXPECT. The market is comprised of many people who have different motives, perspectives and expectations. This results in liquidity, allowing transactions to take place.
There are stock markets in various countries. Below are some commonly known stock markets:
Where do I start?
In addition to what I mentioned in my previous article, if I had to start all over again, I would:
– Get a profitable mentor (preferably 1 to 1)
– Read many trading books
– Learn programming
– Determine my processes, setup trading account and paper trade i.e. trade with fake money
– Trade small with real money
– Scale up once I am confident and profitable
The past few years have been messy and challenging in fulfilling my past regrets. My next challenge is to scale and create more robust processes.
You are at the stage of exploring the stock market. It wouldn’t be wise to jump in without having considered more cost-effective ways such as reading.
Recommended books for beginners
Market Wizards by Jack D.Schwager. This book will provide you with a realistic view of trading/investing – top fund managers are making on average 25% in the long run. This book will show you that trading isn’t a get-rich-quick scheme; trading is hard work!
Warren Buffett and the Interpretation of Financial Statements by Mary Buffett. This book is excellent for those who would like to invest and hold stocks like Warren Buffett.
There are also many other books about Warren Buffett which are helpful.
Art and Science of Technical Analysis by Adam H.Grimes. This is a must read for all traders. It has sharpened my thinking and improved my processes.
Technical Analysis Explained by Martin Pring. This is a very long read. However, this is a treasure trove. The section on chart patterns contains a wide range of chart patterns that are well explained.
What’s the result of reading these 4 books? You will gain a broad overview of the stock market.
Share this article to your friends who are also starting out. Come back for more sharing to shorten your learning curve and be well-informed.
Swim Trading Resident Columnist