Stock Market Basics | Investing and Trading for Beginners

Investing and the entire financial world can be quite daunting to a new investor. In fact, there is much to learn even for a seasoned investor. The global economy is changing at wrap speed and will always be changing. That means there will always new things to learn and more information to process.

In any case, everyone who steps into the wild world of investing should understand some stock market basics before getting in the game. They should know who they are as an investor, what they want to accomplish and how they will proceed in accomplishing those financial goals.

Here is a sketch of how the stock market works so that you know where you fit in. In fact, as you start reading you may come to discover that you have more of a start than you realized.

Before we get into the mechanics of stock market basics, let's first talk about how you want to approach it. Are you going in as an investor, a trader or a bit of both? Let me explain.

An investor is someone who is looking for assets to put his money in and to see it grow over time. That means they are looking for long term investments as opposed to short term gains.

Essentially, they are looking for a place that gives more of a return than their checking account but aren't interested in gambling away their capital either.

Then there is the trader. These are the rock stars of the financial world. Well, the successful ones are at least. These guys are looking for extraordinary, short term returns.

They are looking for good companies that will provide a steady growth over time. They are looking for companies that will spike in share price in the short term. Or they are looking for stocks that are going to tank so they can short them and make a profit off of their decline.

Many people do a mix of both. But you need to decide which one you are primarily going to be. Are you going to be an investor that trades? Or a trader that invests? Once you decide that, then you can decide what kind of approach you will take to the stock market.

Stock Broker

The first practical thing you need is a stock broker or online brokerage account. Average people can't trade stocks directly. They need what they call a broker-dealer to make the trades on their behalf.

You can get a retail broker from financial institutions like Merrill Lynch, Morgan Stanley, and Charles Schwab. The commissions for these retail stock brokers can be as low as $30 per trade and on up. You can also use a fee-only financial adviser like American Express Financial Advisers and Edward Jones. They don't charge commission but you pay them a fee for giving you advice.

Many people these days choose to go with an online brokerage account like Etrade and Scottrade. This is a more do-it-yourself approach that many have found to prefer. Although many people still like the comfort of working through a real person. You can get trading commissions for as low as $8 per trade. If you're a day trader who does a large volume of trades a day, you can usually get even lower commissions.

Here are some common terms you need to know in understanding the basics of stock market investing and trading. If you understand this list, you should be able to understand most commentary and analysis that you see and read in the news media and annual reports.

When it comes to stock market investing, you are basically talking about doing fundamental analysis. Fundamental analysis is doing financial statement analysis, looking at the management of the company, analyzing the business model and it's competitive advantages in the marketplace.

Investing is less about what the share price was today, as much as will the business be healthy and have sustainable growth over the long term. Once that question is answered in the affirmative, then you can take a look at the share price and see if it is an undervalued stock.

More specifically, this is called value investing.  Warren Buffett popularized this method of investing.  Essentially, he looks at companies and decides what he thinks the overall value of that company is.  Then if the market capitalization of that company, which is what the stock market is saying it is worth, is less than what he thinks it should be, then he buys it.

Again, trading is a lot different than investing. Traders look more at what they call technical analysis. This is a method of looking at chart patterns to see how the market will behave. They use terms like trends, support and resistance levels, channels, head and shoulders and moving averages to predict where the price will head. Then they trade based on those predictions.

Trading is a lot more hands on and short term. Of course, they are looking for a long term growth in their portfolio just like the investor. But the trader is wanting that growth to come from consistent short term gains that will hopefully outweigh the losses.

Both of these have their advantages and disadvantages. One of the first steps in getting down the stock market basics is deciding which of those roads you will take.

Other Advanced Investing

If you are interested in more advanced methods of investing, you can look at investment properties to buy and rent out.  It's a little more labor intensive, but it can make you a great return.  Buying foreclosed homes as investments are a great business too.

In addition, there is a new industry around life insurance settlement options for seniors who don't need their policies anymore.  Instead of them letting it lapse or surrendering it for cash value, you can buy them and get the face value once they are deceased.  It's a tricky business, but it might be a good advanced method of investing.