(U.S. stock market - a beginner guide for trading.
Introduction:
Everybody wants good health and happiness in life. In addition to other things, we need sufficient money to become healthy and happy. To earn the money; time and skill is required. In our fast and busy life, we need the methods to earn money online at any location/time as per our comfort. This may be done with a smartphone or any internet device because it always remains with us. To earn money with the help of smartphones/internet devices from the stock market is one of the best ways in the present scenario. We can earn money round the clock from any location in the world by trading in the US market.
It can be done at home or office or on the way with the help of a brokerage account which can be operated on a website or app of brokers. Brokerage firms take little amount to facilitate the trading (buying and selling of stocks etc.) and some other charges as per the scheme of the firm and governing regulations. We require computer or laptop, internet device or smartphone with internet connection to trade in the stock market. There is no need to go anywhere for this business. It is a paperless business and operates at the point of ease.
Why should we focus on earning money from the US stock market?
Some of the reasons are listed below:
The US stock market has the world’s largest stock market hub.
The fastest growing companies with a well-established position and consistent growth record are listed here.
Various companies listed in the US market have a worldwide horizon.
The US has established the position of world leader.
Foreign companies are also listed in the US market.
Foreigners are also interested in trading in the US stock market.
Strict regulation and transparency give us confidence for the safety of the money invested.
Companies listed in the US market are paying the best dividend (share from the company profit). It is additional money which we get frequently.
Since we trade in US dollars, its value in the international market is also growing, in turn it again generates additional wealth.
So, we can expect the fastest way to earn more money from the US market.
Basic requirement to earn money from US market:
1. A bank account - Normally everyone has this account.
2.A brokerage account - Very easy to open this account with basic information and documents. Various online platforms (brokerage firms) are available to welcome you.
3.A small amount of money (say 1000$) is sufficient to start the profitable journey.
4.Basic knowledge of the US stock market.
Here, we will learn about the basic knowledge to start earning from the US stock market. This article may be a boon for beginners. So let us join the journey here:
Origin of the stocks (from where stock comes?):
What is stock? What are shares?
We may understand this with the help of an example as given below:
Suppose we have purchased 100 units of stock of a company. Unit price of a stock will vary day to day on the basis of market movement. Suppose the unit price of purchased stock is10$, in this way, we have invested $1000 in this company. If we divide the market value of the company by your investment (i.e. $1000), we will get some value. That fractional value will accordingly show your ownership in the company. If we multiply this resultant value by 100, we will get our percentage (%) share (ownership) in the company. Stocks are also called securities or equities.
Buying a Stock shows your fractional ownership (share) in the company. Roughly, we can say that the stock or share are almost same thing.
What is the stock exchange?
The stock exchange is a platform where several companies are listed, and trading (buying and selling) is carried out by the public and firms.
What is the Stock market?
Collectively different stock exchanges are called Stock markets. The US stock market is governed by the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) etc.
In the US stock market, many stock exchanges are operational and roughly more than 5600 companies are listed in the US market. However, the following two are the world’s largest stock exchanges:
1.New York Stock Exchange (NYSE)
2.National Association of Securities Dealers Automated Quotation (Nasdaq)
1.New York Stock exchange (NYSE):
It is the oldest one stock exchange established in around 1792.
Roughly 1980 companies are listed in this stock exchange.
Its trading office is located on the wall street floor in New York city, so sometimes it is called Wall Street exchange.
2.Nasdaq (National Association of Securities Dealers Automated Quotation):
It was established in 1971 and fully electronic trading is carried out. No office trading is here.
Roughly 3390 companies are listed in this stock exchange.
What is an index?
An index (Dow, S & P 500, Nasdaq composite etc.) is a group of listed companies which are having similar activities in a particular sector. It measures the performance of a specific sector.
They explain to us that the share prices of the companies of a particular sector are falling or rising. For example, if the total market value of all companies under an Index (say Dow) falls by 4% in a day, it means Index (Dow) will be down by 4% on that day. So, we can say that Index movement is an average of movement of all companies under this Index. When we say that the market is down or up, it means that the related index is moving down or up.
There are several indexes working in the US stock market, however the following three are the main indexes which give us an updated real picture of the US market and followed by most of investors and movement of these indexes are broadcasted by media and business news channels:
1.Dow (Dow Jones Industrial Average - DJIA) index:
Dow Jones Industrial Average (DJIA) is called Dow in short.
It included the top 30 largest companies in the US market.
These companies are also called Blue Chip. These companies are famous for giving dividends and globally reputed companies with sound growth records.
It is an index of the moving average of 30 companies coming under it. Or we can say that the Dow shows the average performance of these 30 companies. It covers roughly 25% of the value of the US market.
It is a price based (price weighted) index. It means that it is the average of the unit share price of all 30 companies on a particular day.
It includes both exchanges i.e. NYSE and Nasdaq.
2. S & P 500 (Standard and Poor’s 500) Index-
The Standard and Poor’s 500 is generally called the S & P 500.
Showing the performance of top 500 domestic companies of the US market.
Covers more than 75% of the US market capital.
Top 500 domestic companies are selected on the basis of their total capitalization. Other factors are also considered.
It is a capital-based index (capital weighted), which implies that it is an average of the capital values of all 500 companies under this index on a particular day.
It includes both exchanges i.e. NYSE and Nasdaq.
3. NASDAQ composite index
It is an index measuring the performance of 2500 companies largely belonging to the technology field like Apple, Microsoft, Nvidia etc. It also included companies which are operating outside the US.
However, companies in other sectors (financial, industrial, insurance, transportation etc.) are also included in this index.
This index contains large and small, both types of companies.
The Dow and S & P 500 indexes includes both exchanges i.e. NYSE and Nasdaq.
However, the Nasdaq composite index includes only those stocks which are traded on Nasdaq exchange.
It is a capital based (capital weighted) index.
It has sub sectors like Semiconductor, software, Biotech etc.
Note: - I would like to mention one more Index which is the Wilshire 5000 index. It is also called the total stock market index because it considers all the companies listed in Stock exchanges of the US market.
What is Large Cap, Mid cap and small cap indexes?
Large Cap Indexes:
These indexes cover the companies which are having large capital.
Mid Cap Indexes:
They include the companies which are neither having large capital nor small capital in the US market or in a particular sector of the US market.
For examples: S & P Midcap 400, The Russel mid cap, Wilshire US mid cap indexes etc.
Small cap indexes:
They include the companies which are having small capital investment.
For example: The Russell 2000 is a small cap index which considers the smallest 2000 companies in the companies listed in The Russell 3000.
Different types of investment:
Few are listed below:
Stock (cash) market: direct buying and selling of stocks of various companies.
ETF (Exchange Traded Fund) - Buying and selling in different indexes of the stock market.
Mutual Fund - Mutual funds are managed by Mutual fund companies. It is a portfolio of different stocks based on predefined parameters. Investors' money is invested in different stocks as per the scheme of mutual funds.
Bonds - means we are giving money to the government, private company on loan basis with some fixed rate of interest and tenure depending upon the scheme.
What is a brokerage firm or broker?
Public do not buy or sell directly the stocks of the listed companies from the exchanges. Stocks are traded through some brokers who represent us in the exchanges. Brokers are authorized by the governing bodies. For this job, brokers take the charges from us for buying as well as selling. Charges may vary from broker to broker. Trading (buying or selling) may be done during the live market time or after the market or before the market as per the facilities provided by the brokers.
Who are traders and investors?
What is a bull or bear market??
Bull or bear are symbols which represent market conditions.
If the market is bullish, it means going up, buyers are more active than sellers, demand is more and good for the growth.
If the market is bearish, it means the market is going down, sellers are more active than buyers, supply is more and demand is less, traders/investors want to pull out their money from the market. It shows bad news for growth.
What is the correction, recovery, Volatility and crash in the stock market?
When the value of a stock unit price or an index is much more of its real value due to some market conditions. Market adjusts such value near to its real value. It is called correction.
Similarly, When the value of a stock unit price or an index is coming up from a downfall, it is called the recovery in the stock of the company or in the index.
Volatility in the stock market is the sharp fluctuation in share prices of the securities. Since several thousand companies are listed in stock exchanges, volatility will occur frequently due different conditions affecting the performance of the companies.
When the value of a particular stock or index suddenly falls too much in a day (say 20 % or more). It is called a crash. For example, during COVID 19 pandemic, mostly all stocks or indexes were suddenly heavily down, so it was the crashed market.
Portfolio: -
It is the list of stocks purchased by us. Portfolio should have shares of 5-6 companies of different sectors.
This diversification is required due to some of the following reasons:
Generally, all sectors do not perfect well daily. Some will perform up and some will go down and moreover their fluctuations (volatility, changing the price on a daily basis) will be different, some will be up by 1,2,3,4% or more and some will be down by 1, 2, 3, 4% or more.
If we are required to sell the stock due to need of money, we may sell the stocks which are in profit.
Chance of loss will be reduced by diversification.
Goal of investment: -
Investment should be done as per our present and future requirement, capacity and prevailing conditions.
Some of the factors are listed below:
Marriage expenses.
Car purchase expenses.
House purchase expenses
Old age expenses.
Retirement plan.
Monthly Health insurance premium
Monthly routine expenditure.
Emergency fund to meet the demand of unexpected happenings.
Other expenses as per individual need.
It depends upon age also. For example, if you are 25 years old and your requirements and future target may be different from old age people.
Accordingly, we have to divide our earnings. We should have a balance in our account for routine expenses and emergency funds for the next 01 year (or as per individual need).
Remaining surplus money, we can invest as per our target as given below:
Money needed within a year should not be invested in the share market.
Money needed after 1 year should be invested in short term trading.
Money needed after 3 years should be invested for the long term in the share market/ETF/Mutual fund/ bond etc.
Example: If we want to invest for the long term i.e. want to withdraw the money at the age of around 60 years. We may opt to invest in an Individual Retirement Account (IRA) or a 401(k), if it is facilitated by the employer. In 401(k), If the scheme offers a match plan, then we will get some money for free. For example, if an employer offers a 5% match, and my annual earnings from the company for this purpose is $120,000, and if we invest $6000, the employer will deposit $6000 in your account for free. But in a scheme like 401(k), we cannot withdraw money before the age mentioned in the scheme, it may be around 60 years, except for some special specified purposes, otherwise we have to pay a penalty.
How much money is required to start the Investment??
Roughly we should have at least $1000 as a surplus amount in your bank account. Surplus means after keeping aside a sum of amounts to meet the demand of a year or depending on your financial position.
Tips for beginners:
Use dummy live trading simulators, or live practice sessions without investing money to learn the trading on the platform. You will feel real live trading without investing anything. Various simulators or dummy live trading sessions are provided by different service providers.
Start the investment from a minimum amount to avoid any mistake which may lead to a loss.
It is advisable to invest in Indexes, Exchange Traded Fund (ETF) - Buy when the market is down from the previous day value. And sell when the market is high enough to get the profit as desired or decided. Indexes and ETF fluctuates less compared to a single company because it is an average of the fluctuation of companies under the umbrella. Therefore, risk is very low.
Second option -
Buying strategy for beginners:
In the beginning, buy the shares of top 100 leading companies, because they are fundamentally strong. The Chances of loss are minimal.
We may start the short-term investment from a small amount.
For example, if the cost of 1 share of a particular company is $50. We may buy a fraction of this share i.e. $ 20 for 0.40% of a share. So, we require a $20 + applicable charge. While purchasing the stocks, we should also keep in mind the minimum charges (if any) taken by the broker. Accordingly, we may fix the minimum quantity of stock to be purchased to get the benefit of minimum charges taken by the broker. For example, if in this example, the minimum charges of broker are same for 1 share or .50% share, we should purchase 1 share instead of fraction of a share.
After gaining the experience, we may invest more and more, as per our target and capacity.
Buy always when the value of a share is falling down. At what down percentage, we should buy the share? It depends upon the company-to-company performance. For example, if the share of a particular company fluctuates 1-2% on a daily basis, but one day if it falls by more than 4%, we may purchase it.
Keep in mind that this fluctuation (more than 4%) is not due to any trouble in the company, but due to the sentiment of the market, and other political or global reasons which will not affect the company in the long term. Such types of shares are expected to recover within a short time.
For getting such types of knowledge, daily dose of market news is mandatory. Some special tools (like Trading View, Stock Rover, Trend spider, Benzinga Pro News, stock chart indicators, candlestick charts, etc.) may be utilized to gain the knowledge of Fundamental and Technical position of the stocks. Such types of tools may give you an idea of the trend of stock price, however, nobody can predict the market 100% accurately.
Selling strategy for beginners:
First calculate the buying price of a share by adding all charges, and taxes as applicable.
Also, calculate the selling charges similarly.
Suppose I purchased a share for $100. And $2 is the total charge including buy and selling charges and other charges like income tax etc. (if any). So, we assume that the real buying cost of this share for me roughly comes at $102.
Now we may sell it @ $104, so the net profit for me is $2 on this share.
So roughly we may get a profit near 2% in a short period.
This short period may be the same day as the buying day, 1 day or 1 month, and so on.
If we consider this short period as 01 month for the safer side, our annual profit maybe 20%.
A list of 100 important companies in the US market is given below for buying purposes. Beginners may utilize the given list or a similar type of list. After gaining the experience, they can change their strategy accordingly.
Disclaimer: The best efforts are made to provide good knowledge for beginners and credit goes to following references:
https://edition.cnn.com/cnn-underscored/money/
https://www.investopedia.com/insights/
https://www.nerdwallet.com/article/investing/
https://www.bankrate.com/investing/
https://www.investopedia.com/terms/s/stockmarket.asp
https://fortune.com/recommends/investing/how-to-start-investing/
https://www.synovus.com/personal/resource-center/investing/
https://www.wallstreetsurvivor.com/starter-guides/
https://www.liberatedstocktrader.com
https://www.slickcharts.com
Other similar websites/information available on the internet.
This article is posted for educational purposes only and not approved by any authorized organizations or entities. I am not a certified financial advisor and do not have exposure to the US market. I do not take any legal and financial guarantee of its correctness and consequences. Market cannot be predicted 100% correctly, so market risk is always there. We cannot control the market movement and have no guarantee of profit in any company. Before investment or trading, consult any financial adviser.
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