Stock information for Beginners

Document Sample
Stock information for Beginners Powered By Docstoc
					                         Stock Information for Beginners
Stock information for beginners provides useful tips for people interested in playing the stock market. Read
more on stock market information for beginners.

People who are interested in playing the stock market, should be aware of the pros and cons of
investing and speculation. They should also be comfortable with the strategies that can help them
protect their profits and limit their downside. The write-up aims to provide useful stock information
for beginners who may end up becoming savvy investors.

Stock Information for Beginners: Tips and Strategies
The article, 'how to play the stock market' explores the difference between speculation and
investing. Although, speculation is a distinct possibility, it is a very risky proposition. Thus,
beginners should focus on investing rather than speculation. The following write-up focuses
exclusively on stock market investing for beginners.

Buying Stocks without a Broker
Direct Stock Purchase (DSP) Plans and Dividend Reinvestment Plans (DRIP) enable people
to buy stocks without a broker, since these plans allow investors to purchase stocks directly from
the issuing company. DSP allows people to set up a stock purchase account and purchase
shares from the issuer without paying a commission to the broker. Unfortunately, direct stock
purchase plans are not offered by all publicly traded companies.

DRIP requires the investor to purchase the first stock from the broker. After the initial purchase,
an investor can buy stocks from the company using cash dividends and capital gains. Although
this is a good option for people with less money, the main disadvantage of a DRIP is that, people
buy stocks on an ongoing basis and it becomes difficult to calculate the capital gains.

Read more on:

        Buying Stocks Without a Broker
        Calculating Return on Investment

Discount and Full-Service Brokers
People may use a discount broker if they are interested in trading stocks, for beginners may find it
difficult to pay for the services of a full-service broker. A full-service broker provides useful
investment advice, retirement tips, estate planning advice and tax advice in addition to offering
the usual buying and selling services. Full-service brokers are very expensive as compared to
discount brokers and are meant for wealthy investors. Read more on stock broker salary range.
How to Play the Stock Market?
Stock investing involves buying undervalued stocks and selling overvalued securities. An
undervalued stock is one that is worth more than the current price at which it's trading. The
investor is required to estimate the actual value of the security. This can be done using the
dividend discount model (DDM), the free cash flow model or the residual income model.
Generally, firms that have a history of dividend payments are ideal candidates for DDM. The free
cash flow model and the residual income model are appropriate for firms that have positive cash
flows and reliable book values respectively. If the actual value of the stock is greater than the
current market price of the security, the stock is undervalued and one must buy the shares. If the
actual value is less than the market price, a prudent investor should short sell the security. Short
selling involves selling borrowed security and it's a very risky proposition, since inaccurate market
timing may make it difficult for the borrower to sell the security at the desired price. Read more
on online trading.

Stock Trading Strategies
Investors generally place a market order when they are confident that the stock can be bought /
sold at the desired price. In case of uncertainty, investors should place a limit order. For instance,
if a stock is trading at $55, an investor may ask the broker to buy the stock at $50 by placing a
buy limit order. One must bear in mind that the limit order will be fulfilled only if the market price
reaches $50. Similarly, another investor can place a sell limit order at $65 for the same stock.

The investor also has the option of placing a stop order. For instance, one may buy a stock at
$50. If after purchasing the stock, the price falls, one may place a stop sell order at $45 to limit
losses. The stop order will be fulfilled only when the price of the stock falls below $45. The
investor may also use the stop order to protect profits. The investor may place a stop order at $55
to guarantee profits.

Investors may also place a stop limit order which is a combination of a stop order and a limit
order. This may be used to buy a stock within a narrow price range. For example, if a stock is
trading at $50 and the investor is unsure about the direction of the market, he/she can place a
stop order at $55 and a limit order at $57. In other words, if the price of the stock exceeds $55,
the stop order becomes a limit order and the stock will be purchased at $57 or less. However, if
the price jumps to $58 the order will not be fulfilled. Had the investor purchased a call option, with
an exercise price of say, $52, he/she could have still purchased the stock that is trading at $58.
Call and put options on stocks are highly risky and are meant for savvy investors. For more on
stock options (information for beginners) one may refer to articles on options trading. Similarly,
margin trading is not advisable for beginners and hence we shall not be discussing the same. For
more on margin trading and investing advice for beginners, one may refer to the article titled,
'online stock trading tips'.

Know more on:

       Day Trading Rules and Regulations
       Day Trading Strategies that Work

Hopefully, the in-depth discussion on stock information for beginners will be useful to the novice
trader. Savvy investors can consider options trading to augment their income. Margin trading or
leverage may also be used for increasing the return on investment.

Shared By: