The stock market is one of the most sought after investment options available today. When we talk about financial markets, the stock market is one that cannot be ignored. And with good reason. If you want to make your money work for you, prevent inflation from eroding your savings, build generational wealth and cultivate good financial habits and financial knowledge, you must be in the stock market.
Investing in the stock market is a great way to put your money into good use and build long term wealth. However, as a beginner, it is important that you get the right help and guidance before you venture into the market. Knowing basic stock market terms and principles e.g stock exchange and stock index will help you gain a better understanding of this investment option and fast track your mastery of the stock market.
Moreover, you will be able to know how to buy the right stock and apply the necessary entry and exit strategies in order to avoid loss. Let’s find out what the stock market is, how it works and the pros and cons of investing in the stock market.
In this article
What is the Stock Market?
The stock market is a platform/marketplace where shares of publicly traded companies (stocks) are bought and sold by investors. When a company wants to raise capital, it can choose to go public by offering shares of ownership of the company to the public.
People who are willing to buy these shares (investors) can then buy or sell these shares amongst themselves in the stock market. Once you have bought these shares, you have a portion of ownership in the company depending on the percentage you have bought.
The value of a share is determined by the supply and demand for the stock in the market. If many investors want to buy the stock, the price will go up, and if many investors want to sell the stock, the price will go down.
How Does The Stock Market Work?
The stock market works through stock exchanges, which are essentially marketplaces where stocks are bought and sold. In Kenya, the Nairobi Securities Exchange (NSE) allows these buyers and sellers to connect and trade stocks whereas the two main stock exchanges in the United States are the New York Stock Exchange (NYSE) and the Nasdaq.
On these exchanges, companies can list their shares to the public, what is known as the Initial Public Offering (IPO). Interested people will then buy these shares and the money that these companies receive from this will be used to further business expansion and operations.
After buying these shares, investors can then sell or buy shares from other investors within the stock exchange platform by following the bid-ask for a trade to occur on a broker’s account. A stock broker simply means individuals or companies who buy and sell stocks and related securities for you through a stock exchange in return for a fee or commission.
With the stock exchange, you are able to track the demand and supply of each stock and keep a watchlist to stay on top of the stock market.
How Do I Invest In The Stock Market?
There are 3 ways to start investing in the stock market. The first way to do this, is to purchase individual stocks of the companies you are after. With that you manage your investment by yourself. You can also start investing in the stock market with a stock broker ( who will act as middlemen between you and the stock exchanges) or with an individual retirement account.
Here is a quick summary of what you need to do to buy your first shares today and start trading:
- Figure out the company shares you want to buy. Do you have a company in your mind that has been listed on the stock exchange platform that you’d like to buy? How has this company been performing overtime and have you looked at the growth prospects and its overall valuation? Some of the Kenyan companies that are listed on the NSE include Kakuzi, British American Tobacco and Safaricom. For the US stock market, you can look at companies like Apple, Realty Income and Microsoft for a start.
- Choose your securities wisely: There are so many things that will go into you settling for a particular stock. For example, how much are you willing to part with and invest into this particular company? How risk tolerant are you? What fees are included and do you want to invest for the long or short term? Work this out before you buy your shares.
- Look for a stock broker: This here applies to those who want to trade with a brokerage account. Oftentimes, stock brokers have mastered the stock market and will help you to easily navigate your investments by trading for you. However, before you settle for any stock broker, ensure that they are trustworthy, reputable and well licenced in order to avoid scammers and fraudsters.
- Open a trading account: If you want to start trading in Kenyan stocks, you need to first create a valid CDS account. You can open your account with the Central Bank of Kenya, or any other approved financial institution e.g HisaApp. To start trading in US stocks, you can download the HisaApp, create an investor profile and once you get approved you can proceed with trading.
- Buy stocks: After everything else is in order, you can now proceed and buy the stocks you want. Don’t forget to build a meaningful portfolio and diversify your investments if you want to earn dividends and earn good returns. Kindly note that to buy Kenyan stocks, you need to buy at least 100 shares of the price of the stocks you have chosen plus any brokerage fees incurred. For example, if you are buying Safaricom shares,and it is currently trading Ksh. 23.00 that will be 100×23=2300 plus any brokerage or transaction fees. To start trading in US stocks on HisaApp, you only need a minimum of $5.
Which Stocks To Invest For Beginners?
Buying a stock is easy, but buying the right stock without a time tested strategy can be quite difficult. For a beginner in the stock market, you may be wondering what best stocks you can buy now or put on a watchlist. Depending on your needs, you may want to buy cheap or safe stocks or both. Remember, the one thing you must not forget is to diversify your portfolio.
For a start, you can consider looking at these stocks and start building your portfolio today:
In Kenya; Safaricom ( $SCOM), KCB ( $KCB), Umeme ( $UMME), Carbacid ( $CARB) and Flametree ( $FTGH). The first two are blue chip stock, while Umeme and Carbacid currently have the highest dividend yield in the NSE and are good for your income portfolio. Flametree is a penny stock to grow your income.
In the US stock market; Apple Inc ( $AAPL) , Warners Bro ( $WBD) , NVIDIA ( $NVDA)- a high moat stock dominating the computer chip production industry, Occidental Petroleum ( $OXY) and Realty Income ( $O) (which pays monthly dividend).
Pros & Cons of Investing In The Stock Market
Like any investment, before you put your resources in the stock market, you need to know what’s in it for you. What do you stand to lose and what do you stand to gain? What are the advantages and disadvantages of investing in the stock market?
i) Pros of Investing in the stock market:
- You do not need a lot of money to invest. Like I mentioned earlier, to invest in Kenyan stocks, you only need money for the price of 100 shares to start investing, while for the US stocks, you can start investing with a minimum of $5 on HisaApp.
- Staying ahead of inflation. Investing in the stock market means you do not have to worry about your money being devalued overtime because the buying and selling of shares is always at current market prices.
- You earn dividends. You will be given periodic payments by the company of your choosing, thereby growing your income through these profits.
- Growth with the economy. As the economy keeps on growing, your gains in the stock market will also keep on increasing. This is why the stock market is very important if you want to build long term wealth.
- Taxes are paid on gains only when one sells stocks. When you are just starting out in the stock market, you do not have to pay high taxes. Moreover, taxes are paid on gains only when someone sells their stock.
ii) Cons of Investing in the stock market:
- Risk of loss. The stock market is a very risky venture and you stand to lose it all if you are not careful enough. You have to do your research, take time to prepare and follow the right websites and groups that will help you grow your knowledge and manage this investment well.
- High competition. There are many companies that sell shares to investors at highest bids and many investors want to get these shares. You need to have the right strategies set in place to stay above competition and get the best out of the stock market.
- Stock mispricing. When there is a difference in the current price of a stock and its fundamental value, we say the stock has been mispriced. This occurs when there are changes in the economy or timing factors that cause their prices to fluctuate. This is a risk of loss that should not be overlooked.
- Stress. Things like market movement and fluctuation in stock prices can be quite hectic for investors who want to make sure they won’t lose their money. Furthermore, it takes time to master the stock market so you may have to go above and beyond to learn fast.
Stock Market FAQs
Q. How do you make money in the stock market?
In the stock market, you make money when you are paid dividends. Dividends are any sum of money paid by a company (either annually, monthly or quarterly) to shareholders out of its profits. This is the most common way investors get returns in the stock market. Other ways to generate income in the stock market include reinvesting your dividends, buying and holding these stocks, choosing the right investment account and opting for funds over individual funds e.g ETFs like VOO for the US market.
Q. How does the stock market buy and sell?
The stock market operates on a public platform where investors carry out transactions of buying and selling shares on the stock exchange platform through a broker e.g HisaApp. With a broker, you only need to input the stocks you want to buy and your broker will make this order for you, before it is delivered to your account.
Conclusion
The stock market can be influenced by a variety of factors, including economic indicators, company news, and geopolitical events.
Investors use various strategies to try to profit from the stock market, including buying stocks they believe will increase in value, short selling stocks they believe will decrease in value, and trading stocks quickly to take advantage of short-term fluctuations in the market.
Investors should be aware that the stock market can be volatile and unpredictable, and that investing in the stock market carries risks. It’s important to do thorough research and consult with a financial advisor before making any investment decisions. With that, I hope you find this article useful to help you understand the stock market today.
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