I want to start this article by asking you a simple question: Why is investing so important? You might have plenty of plausible answers, but I am going to share mine.
Basically, investing your money for the long-term means that you’re going to have a good amount of cash in your reserves when you retire.
Picture this in your mind: you start saving some of your monthly salary in your retirement fund. Most people retire at the age of 65. Suppose that you have been saving $1400/month for 26 years. That would give you a total of $403,200.
And, say, you retired at 65 and your cost of living is $60,000/year, you’re only good for the next 6.72 years which will result in you not having any money by the age of 71 or 72! And take note, you’ve been saving money all your life and you’re still going to suffer the prospect of not having any money left a few years after retirement!
This is where investing in the stock market can help you. Because of compounding interest and the fact that you can earn money by trading your shares or share trading, your investment would grow exponentially. And, if you play your cards right, you will never have to worry about money again.
So, if you’re convinced, here are some steps to understanding how the stock market works, made easy for beginners, of course:
1.How the Stock Market Works
By now, you probably know about the simplest terms about the stock market. You buy shares from a company, you trade them as you see fit, and earn some profit. That is basically the gist of it.
However, do note that the stock market is, well, a market. It follows the law of supply and demand and the share prices vary greatly depending on the ebb and flow.
You have to realize that although stock market crashes can happen (like the great recession of 2008), stocks can still recover from such a huge loss. So, invest with confidence knowing that whatever happens, your shares are still going to be okay in the long-term.
2.Dollar Cost Averaging
Newbie traders do not know how to effectively buy their first set of shares. Surely, you can research a particular company or industry where you want to invest your money in, but how exactly do you maximize your current investment?
That can be solved by using what is known as the Dollar Cost Averaging. In layman’s terms, it is just using the same amount of money every month to buy your shares.
Since the market prices are never constant, you could buy more shares in some months and you can buy fewer shares due to a sudden increase. The idea here is that you constantly pay a fixed amount of money every year to buy your shares.
When you are happy with your portfolio, you can then start trading as you see fit. Just make sure that you get a bigger profit by selling your stocks when the market is bullish (or when prices are expected to rise).
3.How to Maximize Your Dividends
Whenever you buy stocks from a company, you are entitled to receive dividends or dividend payments every year (some give once or twice a year, depending on the company).
Your dividend payments are subject to compound interest which means that you get more every year depending on the total profits the company has earned at that time.
You can maximize your dividends by immediately investing some or all of it to buy more stocks. You can buy stocks from the same company so that your dividend payments will increase or you can buy shares from another company so that you will have a different dividend yield.
4.Minimize Risk by Not Being in Debt
There is this thing called leverage trading which just means that you borrow some money from your broker to buy more stocks. Although you can use this strategy, it is actually riskier than you thought.
Stock trading is risky as it is because share prices are never going to be constant. One day, your shares might cost lower than what you’ve expected and you might be forced to use your own assets just to pay your broker in full (assets that you do not have, considering you’re borrowing money in the first place).
So to avoid headaches, it is best that you do not engage in this investment strategy. Instead, rely on your dividends and your sale from normal stock trading.