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A beginning guide to investing in the stock market

As featured in the Finances FYI section of the the Seattle Times

By 1st Security Bank

With markets nearing all-time highs and retail traders shaking things up, interest in the stock market is extremely high. Newcomers often face a steep learning curve, as the stock market has a language of its own — and professional traders have many advantages to retain an edge. You don’t need to be an expert to have success in the market, however, and with this beginner’s guide to stocks, you’ll be starting on the right foot.

What is a stock?

Simply put, a company’s stock is shares of ownership divided into equal pieces. When you buy one share of a company, you are now a fractional owner. Stocks are often referred to as equities within the financial world. Publicly traded companies issue shares to raise money for new products, research and development or to pay off debt.

A beginning guide to investing in the stock market

How to invest?

Retail trading apps have made entering the markets more straightforward. You now have access to various markets, company news and much more from your smartphone or computer. To avoid losses, it’s recommended to try and diversify your buys to multiple industries. Loading up on one sector and nothing else will expose you to market declines, so try to spread the wealth to numerous types of businesses.

Without hiring a professional financial adviser, picking which equities to buy is entirely up to the individual. If there’s a company that you believe in or a particular business you love to shop at and want to own a piece of the action, then you could buy shares in that company.

A little research can go a long way, and financial statements and company road maps are usually widely available. The two primary schools of stock analysis are fundamental and technical.

  1. Fundamental stock analysis focuses on a company’s financials, measuring its intrinsic value through earnings reports and debt statements.
  2. Technical analysis searches for trends and patterns in the market data itself, paying little attention to the bottom line.

There is no silver bullet when picking stocks, and a strong knowledge of both techniques is advised for serious traders.

Types of trades

The easiest trade for beginners is simply buying shares of a company and holding with the expectation of the share price to rise. This is often referred to as “being long,” and you’ll have total freedom to sell some or all of your shares whenever you want. As long as the price is higher when you sell than when you bought, you’ll be making money.

The other popular trading tool for newcomers is the option. Options strategies and terminology can be incredibly nuanced and confusing, but the trade basics are quite simple. There are two types of options trades: calls and puts.

  1. Call options give you a choice to buy 100 shares of a company for the strike price on the expiration date. If the share price is above the strike price, you’ll make the difference back times 100 shares.
  2. Conversely, put options allow you to sell 100 shares at the strike price upon expiration. If the share price is below the strike price, you’re making the difference across 100 shares. Options come with risk but are one way to try to maximize a limited bankroll.

With improved access and tools for retail traders, the stock market is becoming much more inclusive. Small purchases may pay off big over time, so use this guide as a starting point to get in the game.