While many people do not like to gamble, the attraction of the stock market is too hard to resist. The key reason is that with some smart thinking and a bit of luck, you can make a good profit by investing in stocks.
If you are a first-time investor, then you should tread carefully, investing a small amount first and increasing your investments as you become more experienced and understand market trends properly. Here are some of the basic things that a first-time investor must know before buying stocks.
Types of stocks
There are different types of stocks that you can invest in, based on the market capitalization or the company size, sector and company’s growth pattern. The company’s market capitalization is the product of its current stock price and total number of outstanding shares. For instance, a company with one billion outstanding shares and $15 stock price is said to have a market capitalization of $15 billion.
There are a number of large-cap and small-cap stocks listed on the stock exchange. Stocks are also divided into sectors, including healthcare, finance, technology, banking, utilities etc. Some are fast growing sectors, some stable with moderate growth and others with cyclical growth patterns that change in accordance with the economic environment.
P/E and PEG
A company’s price to earnings ratio is an indicator of how good or bad the return on your investment can be. It tells you whether the particular stock is undervalued or overvalued. For instance, a $200 stock may not be expensive in comparison with a $75 share if the earnings of the former stock are strong and growing at a faster pace than the earnings of the lower-priced company.
PEG ratio, which is the price to earning ratio divided by the company’s long term rate of growth, is also an important consideration when picking a stock. A PEG of 1.0 or lower usually indicates that the stock is trading in expectation with its rate of growth.
Your stock portfolio should ideally consist of companies that are financially strong and have a good earnings growth. A well diversified and balanced portfolio will cover multiple sectors, with a mix of mid-cap and large-cap stocks.
The rise or fall in stock prices is affected by a number of factors, such as earnings reports, government policies affecting a particular industry, new announcements by the company, global stock market trends and a number of other reasons.