If you are interested in investing in stocks but don’t know where to start, that’s completely fine we were all there before. To help you find the easiest methods for understanding what drives a stock upwards or downwards, researching stocks you are interested in and creating your portfolio, we created this stock for beginners guide where we will outline the basics of how to become your own stock analyst.
The first thing you need to learn is the different types of markets. Then you should know how to find the best stocks and how to trade them. But to do all this you need to learn some terms and phrases that everyone uses while trading. In this article we will go over some of the most important terms you need to know!
NYSE Vs NASDAQ Vs OTC
There are three stock markets where you can trade different stocks. To be listed in any market, companies have to disclose certain documents regularly and abide by a number of rules depending on each market.
Firstly, the biggest stock market in the US and the world is the New York Stock Exchange. As a public entity organization, NYSE is the largest equities-based exchange in the world, based on the total market capitalization of the securities listed within it. NYSE is also referred to as the “Big Boards”.
Secondly, there is the NASDAQ which is also one of the biggest stock markets in the world. The NASDAQ has fewer requirements for listing than the NYSE. Accordingly, smaller companies or multinational companies based in other countries tend to list on the NASDAQ market.
Finally there is the Over-The-Counter market (OTC) which has three tiers; Pink current, OTCQB, and OTCQX, each more complicated than the one before it. When a company uplists – moves up a tier – from OTCQX it enters the NASDAQ market but that only happens when a company meets the listing requirements of the NASDAQ market which are much more complicated than OTC.
The main difference between the OTC and the other bigger markets is that OTC involves a network of dealers trading directly with each other while NASDAQ and NYSE are centralized stock exchanges that require more mature companies to list in. Bear in mind that not all companies who list in the OTC are penny stocks or even small companies, in fact there are global brands listed in the OTCQX such as Nestle, Allianz, and Danone.
Usually new investors choose to invest in penny stocks as they are the cheapest. It’s understandable that everyone dreams about buying shares with a few cents and then selling them for hundreds of dollars but you have to know that these stocks are extremely volatile and risky.
What are the most common terms?
When you start trading, you will need to know how the company is doing, from press releases to financial statements, every piece of information you can find is vital. There are many terms and phrases that you may not be familiar with but you have to know if you are interested in trading.
- Financial Records
Understanding the financial strength of a company is an essential step in learning about a stock, you will find information regarding the company’s performance and financial position in its 10-K, 10-Q, and 8-K forms.
The 10-K form is the company’s annual report, it outlines the company’s business model, finances, and audited financial statements. While the 10-Q is basically the same but it covers one quarter instead of the whole year. Lastly, the 8-K forms are the reports that the company is obligated to file to announce major events that might affect shareholders, for example an acquisition, bankruptcy, or changes in management.
These forms might be slightly complicated but you can only go through the important numbers to learn where the company is standing at that moment and compare it with previous years or quarters.
- Dividends
Dividends are the earnings a company distributes to a class of its shareholders as a reward for investing and an incentive for further investments. This usually causes a proportional increase in the stock’s price
- Tier Change/Uplisting
It’s always a positive sign if a company is planning to uplist, which basically means moving up a tier in the market. It could be an OTC Pink Current company planning to be OTCQB or an OTCQX company planning to enter the NASDAQ Market.
- Dilutions
Dilution happens when a company issues more shares in order to raise funds for the company. This results in an increase in the number of authorized Shares (the total number of shares available) and lowers the stock’s value for investors.
- Mergers and Acquisitions
A merger happens when two separate companies combine forces to form a new legal entity with one corporate name. Whereas an acquisition is the takeover of one company by another. A way to learn about a possible acquisition is the letter of intent (LOI), if a company publishes an LOI it’s a sign that it is working on acquiring another company.
- Short Squeeze
This happens when some people are betting that the stock’s value will go down, so a group of investors will invest in the stock just to drive the value up. When the stock’s value goes up, the investors who “shorted” the stock – bet it would go down in value – must pay back their bet, driving the value up even higher creating a cycle.
The most famous example of a short squeeze happened with GameStop stock, when a subreddit dedicated to discussing stock and trading initiated a short squeeze on the popular video game retailer – GameStop which then caused major financial losses for hedge funds who shorted the stock.
How much money do you need to start trading?
At this point, you should know what you are looking for and can find the best stocks, so now the question is how much do you need to start your journey of trading. Unlike what most people think, you don’t need a lot of money to start trading.
In fact, most of the online brokerage doesn’t even have an account minimum and the ones that have the minumemes are very low!
Conclusion
All in all, trading is no easy task but with the right information and enough diversification, you can easily make million trading stocks! The most important thing you need to consider is never trade money you are not ready to lose, as even the best traders can lose sometimes.
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