The stock market is doubtlessly one of the most mysterious markets. It has seen countless fortunes won and lost in a single day. By stock trading, several people made and lost millions. But before you dive into making money to become rich with the stock market, you have to understand first how the market works.
There are two ways to make money on the stock market— the first revolves around the idea of selling, and the other is through dividends. But, of course, one unwise move in choosing stocks could bring huge damage to an individual’s finances. Hence, investors need to have a stock target that’s primarily determined through research strategies like fundamental analysis and technical analysis.
Stock Definition
Also known as “equity,” stocks are regarded as the ownership of a fraction of a corporation. This licenses stock owners to an equal proportion of the profits and assets from the corporation they own stocks. The unit of stock is named “shares.”
Having a proportion of stocks means that a person is eligible to vote on the company’s annual stockholders meeting. This is because every stock represents a single vote that an investor is entitled to. A fraction of the entire company’s profit in the previous quarter. Usually, the profit is distributed in a dividend check.
There are countless strategies that investors can use to generate income, and one of these is buying stock when prices are low and selling when value climbs up (buy low, sell high).
Stocks are itemized on a Stock Exchange and are sold to investors, either through a traditional brokerage firm or through brokerage websites like Robinhood and E-Trade. There are also high-caliber exchanges like New York Exchange (NYE), London Stock Exchange (LSE), and Shanghai Stock Exchange (SSE), where stocks around the world are listed.
The value of stock essentially depends on how much an investor is willing to pay for it. The moment a sale has been made; the stock will basically generate a new amount following the last selling price. For instance, when an investor wants to pay more for a share than its market price, then the market price will skyrocket. On the flip side, once not a single investor is willing to pay the market price but is willing to pay lower, the market price will decline.
The definition of stocks seems to look easy when we only talk about a single share, but when a stock can have a hundred transactions every hour, the situation becomes way more complicated. And this complexity serves as the factor to the market volatility in the stock market, making it seem that no stock has a steady market price.
Stock Manipulation
Criminal activity is very likely to take place with so much transaction that’s taking place every day. Some examples are:
- Insider Trading occurs when you have a piece of important information that’s yet to be revealed to the public, and you use that knowledge that’s not known as leverage to either buy or sell stocks. In easy terms, you get information from the inside to overtake others.
- Pump-and-Dump Scam occurs when you convince others to have the same stocks that you have to drive its price up just to sell those stocks after benefiting from it.
- Ponzi Scheme is kind of similar to pump-and-dump. This occurs when a security fraud pays existing investors with funds accumulated from new investors. The organizers of Ponzi schemes frequently promise to invest the money you will give them to generate high returns. However, in plenty of Ponzi schemes, fraudsters often do not invest money.
Who protects investments against these criminal activities?
In America, the Securities Exchange Commission (SEC) is in charge, and in the United Kingdom, there’s Financial Conduct Authority (FCA). These agencies protect average investors by making sure that frauds will get caught as soon as possible. In addition, some organizations are established to help investors determine whether a company is listed through the IPO process.
Day Trading & Long-Term Trading
Day traders are investors who basically hold a stock for only a short span of time. This only means that investors buy stocks in the morning to sell them later in the afternoon. Due to the elusive volatility of the stock market, financial regulators listed day traders as a specific class of investors. Hence, financial websites and brokerage firms have a limit on day trading transactions. To qualify in day trading, an investor must have a minimum of $25,000 on their account
While day trading could bring daily quick profits to investors, long-term trading generates income through holding for a long period of time. In long-term trading, investors look for currently low stocks in price, only to be higher in the following weeks, months, or years.
Short Selling
Short selling is an advanced trading master plan that hypothesizes a decline in a security price or stock. And this should only be embarked upon by experienced investors and traders.
Once an investor short sells a stock, they create a contract with their broker, borrowing a specific number of shares to sell at a specified time. Then, the investor will repurchase the stock to give back to the broker. Take this example of how short selling could generate a lot of money.
If an investor short-sells Stock Y when it’s at $100 per share, they would be able to make $100 multiplied by the number of shares. When the given time is reached, the stock’s price will drop to 95% per share, and investors will repurchase these shares with the money they made.
Once stock prices go down, investors can keep the surplus as a profit and give shares back to the broker. But if the market price increases, then the investor will be required to pay the difference between the sell and buy price. So on the condition that the stock’s price has increased drastically, there’s a big possibility that the investor’s entire capital would be wiped out.
Short selling is basically borrowing stocks, and investors can make a lot of money and eventually become rich in short-selling stocks because there is no limit to the amount they can earn. But of course, high returns require high risk, so always remember that although you can earn a lot from it, you can also lose much.
Techniques to Make Money on Stock Market
If you are a neophyte, you can make use of these two common techniques that investors use to earn money on the market:
- Technical Analysis. It is used to predict data through previous market movements and takes actions according to it. The concept of technical analysis is that the past will probably repeat itself. In market terms, the stocks will probably go in trend again. Investors study the pattern and make a business decision based upon those trends.
- Fundamental Analysis. Unlike technical analysis, this pays more attention to the factors around buying and selling of a stock. The fundamental analysis technique pivots around the intrinsic value of stocks. Factors including the CEO, dividends, or potential intellectual property are considered when choosing a stock that will go high in value.
There’s no right answer on how you could make money on the stock market, but there are surely countless possible ways to do so. So always equip your mind with knowledge and gather resources that you could use up along the way.
