Getting Started: A Stock Trading Primer for Beginners

Written by Andrej Kovacevic

In America, there has never been a wealth generator as consistent as the stock market. It's the great economic equalizer that anyone – no matter their station in life – can use to get ahead. Despite this reality, over half of Americans avoid the stock market like the plague.

That's no small thing, either. Right now, the market is still in the midst of the longest sustained upswing in its history. That means those on the outside looking in have missed out on an unparalleled opportunity to grow their savings and improve their financial condition. When surveyed as to why they're not investing, most non-stockholders cite a lack of understanding as to how the market works.

Nobody should miss the chance to build wealth for that reason. To help, here's a stock trading guide for beginners that can turn anyone from an outside observer into a successful investor. Let's dive right in.

What are Stocks, Anyway?

Stocks represent fractional ownership of a business. Each share makes the holder an owner, who gains the right to have a say in how the business operates. The value of those shares fluctuate due to factors like underlying business performance, overall economic conditions, and the company's future outlook. For publicly traded companies (who issue stocks on open markets), there are often two types of shares you can buy:

• Common Stock – As the name implies, common stock is the kind of share held by the majority of shareholders. It grants the holder fractional ownership that carries the right to vote on the company's direction, as well as the right to any dividends (payouts of company earnings to shareholders).

• Preferred Stock – Far less common, preferred stock in a company grants no voting rights to the stockholder but often comes with fixed dividend payments. They also get first crack at all dividend payments, so they can still earn even when common shareholders receive nothing. The average beginner investor won't encounter preferred stock, because it's typically the domain of institutional or income-seeking investors.

Starting to Invest

The first step that any new investor must take is to open an investing account. That's because individuals don't carry out the nuts-and-bolts work of buying and selling stocks. That's handled by professional brokers and the financial businesses they represent. By opening an account with a brokerage, you gain the ability for them to execute purchases and trades on your behalf. In many cases, (for a fee, of course) you'll also get the benefit of professional investment advice to help you decide on the best stocks to purchase.

For those that don't want to take an active role in building a stock portfolio, there is now also an option to open an account with a robo-advisor. That refers to an investment account that is managed by an algorithm designed to automate the process to meet the goals of the investor. In general, you simply let the system know your financial goals and your risk tolerance – and it will do everything in its power to manage your holdings to meet them without taking more chances than you're comfortable with. Since there's less human intervention in the process, robo-advisor accounts typically come with lower fees, too.

Building Your First Portfolio

If you choose to go the route of managing your own investments, you'll need to choose some stocks to purchase to build your portfolio. In general, you'll want to build one that gives you sufficient protection from losses. That means you'll want to diversify your holdings to include not only stocks in a variety of economic sectors but also things like bonds, real estate trusts, and mutual funds. The idea is to spread your holdings around enough to keep you safe from a downturn, or at least provide you with enough liquidity that you can exit the market without losing your principal investment.

There are a number of theories on the right way to build a diversified portfolio, and many revolve around your specific investment goals and tolerance for risk. Seek out guides that explain your options in detail or consider taking stock trading courses before you make any decisions on your own. If possible, let your brokerage assist you with building your initial portfolio. If nothing else, observing the process can be an instructive lesson that will help you understand the market. Afterward, you can take a more active role as your comfort with the markets grow.

Start Small, Build Over Time

No matter how much money you're willing to commit to your new investment account, it's a good idea to start small while you master the basics of stock trading. After all, it's easy to get in over your head if you're not careful. For that reason, starting your investment with money that you don't anticipate needing back in the short term is advisable. That way, you'll get to witness firsthand how your investment strategy performs before you decide to go all-in.

Always remember, however, that investing in stocks requires a long-view approach. It's important to temper your expectations and try not to panic when there are fluctuations in the value of your holdings. Try to recognize that markets don't always operate on logic – and a strong company can see losses due to jittery investors reacting to the slightest rumors – but that things almost invariably even out over time. If you're willing to take on some risk and stick with it, though, there's no better way to build wealth. Generations of investors have already proven it, and now you know how to become one of them.