October 16, 2021
10
 min read

The Basics

There are many strategies that can help build portfolio growth. Here are a few to know.

Types of stocks

Now that we have our broker account, I want to discuss how there are different types of stocks and how they play a role in your portfolio. Remember, there is no guarantee for stock growth, so we have to decide and choose what is appropriate for our risks and goals.

There are many strategies that can help build portfolio growth, having many stocks may over complicate your portfolio, thus restricting growth. Here are a few to know, please note, that brokers generally list the sector for the stock and these are just general terms.

ETFs –

Exchange Traded Funds, these are more indexes for the market. For example, SPY is based on the index of the S&P 500, QQQ is the Nasdaq Composite, and DIA is the Dow Jones. There are many other indexes too, such as USO, being tied to oil.

Mutual Funds –

Think of mutual funds as a collection of funds put together in a basket or package that many firms offer. These are generally tied to a specific goal such as retirement for 2050, high growth, high dividend, or housing market. There are1000s of mutual funds that are offered and each has different goals.

Blue Chip Stocks -

Blue chip stocks are shares in large, stable companies that are continually profitable. They grow slowly and their earnings are extremely dependable. These stocks are expensive but provide the lowest risk and have an established track record for earnings.

Speculative Stocks –

These are usually startup companies and with no real record in the financial market. While they may be cheaper, there is higher risk. But, many companies have started small and ended up being over a trillion dollars (think Apple or Microsoft before they were known.)

Penny Stocks -  

Low-priced stocks with high risk. They trade at no more than $5 per share or below a fraction of a penny. This type of stock typically is issued by small startups that need to make money. If the company does well, the stock's value can increase dramatically. However, most stocks (not all) in this category fail to thrive.

The basics of buying/selling stocks

Now with our broker, we want to buy a stock, but how? Brokers all have ways to submit on their website, app, or desktop program. Soto help you out, let’s cover the basics of what you may see on your account and what some things mean.

Bid –

In the market, we have bid, this just means what people are wanting to buy the stock at the specific price.

Ask –

In the market, we have the ask, this means that this is the price that people are willing to sell.

*Note* You may see Bid and Ask prices with x100, x1000, or another number, this just means the current amount of stock the person is willing to buy. For example, a Bid of $1.20 x1000 would mean someone is wanting to buy 1000 of that stock for that price.

Spread –

When we hear spread, we want to know the difference between the Ask and the Bid, a higher spread may mean different things that would be beyond to explain in this article as it could be any factor that is unknown. Example, if the bid is $1.20and the Ask is $1.25, would mean there is a spread of 5 cents.

Volume

– Think of buying and selling a car, when you buy a car, you BOUGHT it from the dealership or person, and that entity SOLD. A transaction of a buy and sellis one volume. For example, if say a stock had a volume of 1,000,000, that means the stock was traded 1,000,000 times.

Types of orders

Once you select a stock to buy or sell, there are order types. Here is a simple explanation of what these orders mean. Please be aware that trailing stop may not be on some broker platforms. This will only cover LONG positions (meaning you buy a stock.) This article will not cover shorting.Also note there is an option that says Time-In-Force or something else. When you see DAY or GTC this is what it means:

Day –

The order will fill during the market day, if it does not fill, it will cancel.

GTC –

Good ‘til canceled, most brokers set GTC orders to expire 30 to 90 days after investors place them to avoid a long-forgotten order suddenly being filled

Market order –

This will be the QUICKEST way of buying or selling a stock. What this does is sends the signal to the market at the specific price. This may not guarantee the best price. So if we go back to the car analogy, if you want to buy a stock immediately a market order will fill (be bought) at the ASK price. If you want to sell and submit a market order, it will fill at whatever the BID is at.

Limit order –

Limit orders set a specific price that you want to buy or sell the stock. So, let’s say I want to buy stock ABC at $10.00, but it is at $10.30. I set the limit order to buy ABC @ $10.00, if ABC falls to $10.00, it fills and I bought it for a cheaper price.
*Note* If you set the limit to buy above the market price, it will fill immediately, be careful when you input your orders and check errors in typing or fat fingers on your phone! Same for limit sell orders.

Stop order –

If you buy a security and are unsure if the price will go down, and want to protect your money if the stock drops over time, a stop order can be placed to help.This type of order is to close a position if it falls below what you expect. For example, I bought stock ABC for $10.00. After buying the stock, I want to make sure that if it falls down, I am willing to only lose $2.00, so I would set a stop order for $8.00. What this means is if stock ABC goes to $8.00, the broker will sell it without me having to monitor it.

For our video explaining this and the bid and ask above,view our video and follow us:
https://www.youtube.com/watch?v=dpJCGZ1zc0o

Time to Invest and Set Goals!

Getting into the stock market can be complicated, and it is.But, we can mitigate the complexity by allowing ourselves to understand our differences between trading and investing. We also must set our goals and identify risks.

Trading –

This is more frequent and taking advantage of “news” or other speculative items. Trading should be viewed as a shorter term such as a day, week, month, or year.

Investing –

Investing is to gradually build wealth through a diversified portfolio(s) and allowing dividends and continuing investing capital to the said portfolio(s). Investing should be viewed on your needs and should look into years such as 5, 10, or 30 years ahead.

Dollar Cost Averaging-

This is a great long term goal and strategy to generally apply the conditions of the market to build up your portfolio. For example, if you put all your money in the market one day, and it goes down for months on end, you are not making any money and waiting for it to go back up. However, if you put in a set amount every month, then you have what is called dollar cost averaging.

Taken from https://www.wealthacademyglobal.com/a-detailed-analysis-of-dollar-cost-averaging/

Diversify –

The saying “Don’t put all your eggs into one basket,” applies here. When you look at diversifying, you want everything to grow, but that is not always the case. While it does decrease the amount of money earned in theory, it also reduces the risk of losing money too. There is no crystal ball on what the perfect diversification should be, but many investors follow the modern portfolio theory (MPT.) To read up more on this, here is a wonderful reference

Risk -

All investments have some level of risk and the market is volatile, it moves up and down over time. It's important for you to understand your personal risk tolerance. This means gauging how comfortable you are with risk or how much volatility you can handle. Just remember that economics follows a cyclical pattern, meaning things go up and down. How high or low these patterns occur is never known, hence why we diversify.

 

Once again, we here at PersonaFi welcome you to the world of investing and trading. There will be losses and gains; but, with this guide andthe help from our community, we hope you can retire comfortably and have financial freedom.

 

Robert LaMacchia is a content writer for PersonaFi. He is interested in a wide range of topics from personal finance, business strategy and international technology. Follow Robert on the PersonaFi app at @rlamacchia.

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