The Pros and Cons of Stock Trading for Beginners
Many invest and trade in the stock market so that they can save on their taxes, while some wish to multiply their wealth. One of the easiest ways to make your money work for you is by investing and trading in the stock market.
If you are a beginner to the stock market and wish to know the ropes of it, then this article is just for you. We will provide you with the best advice prevalent in the market that will help you make sound financial decisions while investing and trading in the stock market.
So the question arises: what are stocks? In simple terms, it is a sophisticated way for a company to pool money through crowdfunding. When a company needs funds for starting or expanding its existing operations, it requires a lot of money. They could approach a bank, but seeking retail investors is very advantageous.
When someone invests or trades in a stock market, they own a piece of that company. When you buy stocks, you intend to sell them at a profit; however, there are a few companies that will share a piece of their profit in the form of dividends and bonuses as and when they grow.
However, before you go and start investing and trading in the stock market, we will point out the advantages and disadvantages that will help you while trading.
Reaping the benefits of a growing economy: when the economy flourishes, the companies in that country are responsible for generating the revenues. Due to this, more jobs are available, impacting the amount of money earned as well. When these companies get fat paychecks, they in turn pay the retail investors holding on to their stocks in the form of bonuses and dividends. Growth in a particular sector also helps you as a trader understand expansion, peak, contraction, and trough, in other words, the business cycle. These business cycles are essential, as they help you understand which economic environments are favorable for increasing your wealth.
Staying ahead of inflation: If we were to verify the historical data, stocks have always yielded good annualized returns over a long period. For example, we examine the annualized returns for the S&P 500, which gave 15.43% on its 10-year annualized returns as of January 31. The average annualized returns of the S&P 500 are way better than the average annualized inflation. However, it does require a wider time frame. You may buy and retain in this manner even if the value declines momentarily.
Easy to buy: It is easy to buy stocks in a company, and it’s the first step towards stock trading for beginners. All you need is a stock trading account, and you are all set to begin trading in the stock market. You can either approach an online stock broker, a brokerage firm, or even a certified financial planner to open up a trading account. If you own a small business, you can also invest in and trade stocks through your business.
Requires less capital: Contrary to the belief that you need a huge amount of money to trade in the stock market, you can open up and start trading in stocks with as little as $100. Several retail brokers offer commission-free stock for you to buy and sell. You can buy and sell stocks in fractions, giving you further flexibility while trading in the stock market.
Two ways to make money: There are two types of stock traders in the stock market. Ones who will trade daily in the stock markets are generally called “day traders,” who buy stocks at a low price and sell them at a high price. While some traders will hold on to their investment for a long time in anticipation that the stock’s price will appreciate to a level where selling it can generate a generous amount of profit, these traders are called investors. While there are a few who hold on to their stocks like investors and also indulge in daily trading activities as day traders.
Liquidity: The stock market is open for a limited time each day for five days a week. Within those working hours, you can buy, sell, or trade stocks as many times as you wish. The stock market offers to convert your money into fiat money for a small transaction fee when you sell your stocks. You must also remember that many people enter the stock market because of the volatility of the stocks, which gives them ample opportunities each day to make substantial profits.
As there are advantages to dealing in the stock market, there are also disadvantages associated with it. As a beginner to the stock market, you should be aware of both. We mentioned the advantages; now we will state the disadvantages.
Risk: Stock trading for beginners is such that you run the risk of losing your entire investment if you fail to pick the right stocks. Companies run businesses, and they can also incur losses. If the company performs badly, there is a chance of it going bankrupt. Thus, as a stock trader, you must research the companies whose stocks you are interested in buying.
Stockholders are the last to receive: When a company files for bankruptcy, preferred stockholders and bondholders, or creditors, are the last to get paid. Thus, you must keep a diverse portfolio so that, in the event a company goes bankrupt, you won’t lose your entire investment.
Time: It is essential to research the stocks in which you are interested in investing or trading. You could always rely on others to get the best stock. However, you must remember that each trader has their own financial goals and aspirations. Thus, it is in your best interest to research on your own rather than relying on someone else. Also, choose those stocks that have a proven track record rather than the ones you fancy or admire.
Taxes: If the stocks are sold at a loss, you are offered a tax break. However, in the event you make a profit, you will be liable to pay capital gains taxes.
Emotional roller coaster: Stock prices are volatile, and as a result, they rise and fall rapidly. Thus, it can be heartbreaking for those who wish they had invested a bit earlier or sold a bit later to make substantial profits.
Professional competition: when you enter the stock market, you must remember that several professional traders have years of experience and can read the market indicators better than you. Thus, as a stock trader beginner, you should be well aware of this fact, and it must not deter you from entering the stock market. With time, you will even be well-versed in reading and interpreting the market, allowing you to exploit it.
It can help you a lot if you take trading in the stock market seriously during the learning phase. There are several online stock brokers, brokerage firms, or even certified financial advisors offering a demo trading platform to try your skills on.