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A Beginner's Guide to the Stock Market

A Beginner's Guide to the Stock Market

by Matthew R Kratter

Investing is not magic. Remember that ...

  • most people don't invest at all
  • 75% of new traders quit within the first 3 months. 
  • 90% of new traders quit within the first 6 months. 

If you can stick around long enough and keep learning, you will be successful at...

Stock Exchanges

It's where shares in companies are traded. The most important ones are:

  • NYSE (New York Stock Exchange) - known for "blue chip" stocks like Coca-Cola . Companies here are identified by 2 letters tickets (KO for Coca Cola)
  • NASDAQ - known for tech stocks like Apple. The tickets he...

Every stock has a bid price and an offer (or "ask") price. “You sell to the bid, and you buy from the ask.”

When you are buying a stock, you can use 2 different kinds of orders:

  1. market order: this order tells the broker to get you into the stock...

An index is simply a collection (or "basket") of stocks. An ETF allows trading an index just like a stock. The best-known indexes are: 

  • S&P 500 (trading as SPY): the 500 U.S. stocks with the largest market caps
  • Dow Jones Industrial Average (tra...

Wayne gretzky - Hockey player

 I skate to where the puck is going to be, not where it has been

Active vs Passive Investing

Active investing strategies means picking your own stocks and building and managing a portfolio. It's hard and few people do it well. 

Passive investing strategies mean investing in an index. When indexing, most people like to invest the same dollar amount ...

Dividend Stocks

A dividend stock will usually make a cash payment into your brokerage account every 3 months. Works well as you can take the cash from a dividend payment and use it to buy more dividend stocks. 

A dividend yield is how much money you make yearly compared to the share price (see image): ...

Popularized by investors Benjamin Graham & Warren Buffett, value investing is about buying something for less than it is worth. It's based on this idea that you can find undervalued companies (companies with low P/E - price per earnings). It's hard to do it these days:

  • Finding underval...

P/E Ratio (Price per Earning)

Let's say that a company's stock trades for $100 and that the company has earnings per share (EPS) of $6.50 over the last 12 months. 

We can calculate a trailing ("last 12 months") P/E ratio for that stock by simply dividing the stock price ("P") by the EPS ("E"), so 100/6.50 equals about 1...

Great companies that are rapidly growing will always trade at high P/E's (Facebook, Amazon etc). Value investors will always tell you to stay away from companies with high P/E's. Ignore them. 

Matthew's advice: buy growth stocks that are hitting new 52-week highs, or even all-time n...

Find stocks with the following characteristics: 

  • price at 52wk highs or new all-time highs
  • stock is trading above its 50day moving average and the 50day moving average is above the 200day moving average
  • trends upwards after a earning report
  • markets are up (usin...

Get out:

  • when a stock moves up 100% in 2 weeks or less
  • when you are up 300% from your entry price
  • when all of your friends and CNBC begin to talk a lot about it
  • when the stock closes below its 50day or 200day moving average
  • when the stock has a daily clo...

Risk no more than 1% of the trading account on each stock trade. 

Let’s say that I am trading a $100,000 account. I will risk only 1% of my account, or $1,000. If I enter the stock at 100 and the 50-day moving average is at 95, that means that my risk is 5 points on the stock (100-95). ...

  1. Don’t buy stocks that are hitting 52-week lows. You are most likely catching a falling knife. 
  2. Don’t trade penny stocks. They are mostly scams.
  3. Don’t short stocks. You will probably get burned. 
  4. Don’t trade on margin. Don't borrow to buy stocks. You may lose your hous...

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