Are you interested in investing in pot stocks, but you're new to stocks in general? Well, listen close as we guide you through the basics of the stock market.
In the previous guide, we brought you up to speed with almost everything you need to know about shares. Through this guide, we'll help you take the next step and explore the world of stock markets.
Before you begin trading, you definitely need to understand the stock market in order to find long-term gains, efficiently manage risks, and learn how to keep the odds in your favour.
Keep reading to gather lots of interesting information on stock markets for beginners.
What are stocks?
In case you missed our first guide, here's a brief introduction of stocks.
In simple words, a stock epitomises a legal ownership in a company. Stocks are also known as shares, securities, and equities. A share or stock is an equal part in which a business is divided. So, basically, you can own a part of any company you love, such as Canopy Growth (CGC), Tilray (TLRY), etc. There are two types of stock on the stock market – common stock and preferred stock.
What is a stock market?
A stock market is a complex public platform where the shares or stocks of publicly-listed businesses are bought, sold, and issued. While some people believe it is gambling, trading on the stock market in not gambling by any means.
There are a number of stock markets in the world such as the New York Stock Exchange (NYSE), London Stock Exchange (LSE), and the massive-tech oriented NASDAQ. Most of the Cannabis stocks trade on the Canadian and US exchanges. In Canada, they trade on the Canadian Stock Exchange (CSE) and the Toronto Stock Exchange (TSE).
The reason that most Pot stocks are trading on the Canadian Exchanges, is that is where capital is the easiest to get.
What is the difference between the stock market and the share market?
There's no difference between a stock market and a share market. It's one and the same thing. So, don't get confused the next time you hear both the terminologies.
What is the role of a broker in the stock market?
A broker helps you buy and sell stocks on the stock exchange. Many brokers also advise you on the market trends, the best time to buy, the best time to sell, which stocks to buy, how many stocks to buy, etc.
They are experts in the field of stocks. You'll be required to pay a brokerage fee to avail their services.
How does a stock market function?
Trading on the stock market takes place via stock exchanges where the exchanges act as intermediaries between the traders and the companies, or a group of traders.
Most of the stock market trading these days is done by supercomputers or through brokers who charge a trading fee for performing the trading on your behalf.
Based on a report by JP Morgan, it has been found that human traders now form only 10% of the daily stock market trading activities.
Prices of the stocks – How are they set?
Prices of the stocks are set on the basis of the demand and supply method or the bid and ask method.
A bid is usually the highest amount a trader is willing to pay for a share, while an ask if usually the lowest amount a trader is willing to sell the shares at.
The difference between the bid and the share price influences the prices of the stocks. The other factors that influence the prices of the shares include:
- Opinions of important investors
- The media
- Social and political unrest
- Natural disasters
- The growth of a company
- Future prospects
- Number of buyers and sellers
If there are more buyers than there are sellers, the price of the stocks will rise. On the other hand, if there are fewer buyers than there are sellers, the price of the stocks will decline. How many on each side, defines how high or low a stock can go
How to ascertain the best time to play the stock market?
Most stock exchange experts will say that it's almost impossible to predict the stock market. While it's partially true, there are strategies to identify major modifications on the stock market trends as and when they emerge.
By spotting these trends and tracking them, you can capture massive profits during a critical market uptrend (movement of an asset when the entire stock market is moving in an upward direction) and keep the profits when the stock market enters a downturn (decline of stock prices) phase.
The Bears and the Bulls
A bear market and a bull market. These are terms you will often in connection with your shares that trade in the stock market.
A bull market is named (as you might expect) after a bull. The reason for this is that when a bull attacks, it swipes up with its horns. When a bear attacks from a standing position, it swipes downwards with its teeth and front paws.
So the bull market is a rising market that is characterised by optimism and rising share prices. The bull market, on the other hand, is one that is trending down, with market pessimism driving share prices down as more and more people sell.
Investing vs. Trading – Do you know the basic difference?
Here's a quick recap of the basic difference between investing and trading on a stock market.
In the case of "investing", a person holds the stock for a long-term to gain profits over time. It comes with less risk and is a smart long-term gains strategy. Whereas, in the case of "trading" a person looks to take profits quickly.
There is usually higher risk involved, and the timing on this could be anywhere from 1 day (known as a day trader) to a few months. Point is, it's usually short-term in nature.
Why should you invest in the stock market?
By now, you know what a stock market is, how it works, popular stock exchanges, factors that affect the price of the stocks, and so on.
But, have you wondered why you should actually invest in a stock market Consider the following reasons.
Here are 3 reasons why people tend to want to invest in the stock market:
- With a long-term investment outlook, you glide over short-term volatility and emotional price movements, and with good stock picks, can achieve significant gains over time.
- Investing is a source of passive income. Unlike trading where you are constantly monitoring the market and opening and closing new trade positions, an investment is a passive one at that, working behind the scenes for years.
- Investing is an excellent saving strategy. Instead of spending here and there, you direct the extra bucks toward your investments.
All of the above, however, depends on picking the right stocks. This is the reason that knowledge empowers you as an investor. The more you know about a company, and why you think you like that company, then the "safer" the investment becomes.
It becomes safer because you at least know something about the company, what they do, how they operate, and their management team. And, you know a little bit about the sector that the company operates in.
These are important points of reference for you to answer the question; with everything, I am reading, and what the company is saying, does this make sense?
If so, does it sound credible?
And if so, do I think this could work?
And if the final answer is yes, then go for it. After all, there is nothing certain in life except for death and taxes.
What is a stock's market capitalisation?
You will hear me talk a lot of about a company's "valuation" (or its "Val" or "market cap"). This is simply the total number of available shares (or in the money shares) multiplied by the current stock price.
Imagine this to be the price of the company if you bought all the shares in the company today.
Stock Market Capitalization = Total available shares x Current share price
As an example
For instance, if a company "ABC" has 10,000 shares of the outstanding shares and the shares trade at a price of $50 per share, then ABC's market cap (or Val) would be 10,000 x $50 = $50,000.
Why is this important? Because this is one of the key indicators that investors use. Is the market cap undervalued, fairly valued or overvalued?
To understand value, you have to understand what makes up a company's value. The value is comprised of all the assets, all the revenue, and some prediction for the value of future sales. These (added together) make up the actual (accounting) Dollar value of the company.
This value can then be compared to the company's stock market value.
So, following on from the above example, if company ABC has assets, revenue and forward revenue of $45,000, the company's market cap (or Val) is overvalued
Company value > share value = undervalued
Share value > company value = overvalued
If an investor deems a company to be undervalued, then that would mean that the company's assets, its sales, and its forward facing strategy, is higher than its listed share price. There is now the room for the share price to grow into its valuation
If it is overvalued, then the share price is much higher than the actual value of the company. In this scenario, the share price will either fall to become inline with company valuation, or it could grow into its share price, as most of the Canadian LP's hopefully will do.
Planning to invest?
Are you a stock market investment newbie? Completely green to investing in the green rush? If so, then this section is super-important for you.
Check out the list of do's and don'ts you should keep in mind when making your first investment in the market!
Find yourself a broker. I have written an article here on how to find a broker
This means addressing the fees upfront. You need to ask your broker what they are charging you per trade. This means, when you buy and/or sell a stock, they will charge you a tiny fee to make that trade.
If you plan on trading online, then you cannot negotiate any fees. However, they are usually significantly lower than the fees charged by brokerage houses.
You want to buy 100 shares of Canopy Growth at $60 per share
Total value of trade is 100*$60 = $6,000
The broker charges you 0.005% fee (which is $30)
You need to know these upfront and factor these into your costing when you buy your starting stocks.
Based on the fee in the above scenario, if you only had $2,000 to invest, and decided to buy 4 stocks for $500 in total each, then you would pay 4*$30 = $120.
Now your total fees are actually $120 on $2,000 which is 0.06%
See the difference? So keep an eye on the fees, and shop around. It is really, really easy to buy-and-sell shares these days.
Although the timing is everything, you can mitigate the risk. You can do so by buying in, in smaller positions so that you protect against the downside.
You want to spend $2,000 on a stock.
The stock currently trades at $1.00 per share
You could do one of the following:
- Spend your full $2,000 and buy 2,000 shares (note you will have pay brokerage fees on top of this)
- Buy 1,000 shares now for $1,000 and then keep the other $1,000 in cash
The reason #2 is such a good idea is exactly because of the volatility of pot stocks
Although we are in a bull market, shares don't go up day after day. They have corrections, and these make great entry points to buy shares, in order to "dollar-average" down.
In the above example
Two weeks later the share drops to $0.90
You buy another $1,000 worth.
You now have 2,000 shares but at an average price of $0.95
If the shares did keep going up, then the investor need just be patient. There are always great buying periods, if you are watching the market or following an investor/investing-style newsletter.
In simple, in the cannabis share trading game, we buy the dip and sell the rip!
Do your reading
You have to know what you are investing in. Marijuana sounds cool, but there are so many elements to it.
Are you interested in the medicinal aspect? The pharmaceutical play
Or does the monstrous recreational market inspire you?
Either way is perfect, but then at least know what they're about.
How big is the addressable market?
Who are the big players?
What separates them?
Based on all of the above – whom do you think has the best chance?
(it really, really helps, when you have The Green Fund, as we handle the first three. All you have to do is to figure out…do you like their story? And do you think they can actually do what they say they do?
Play with what you can lose
The MOST important do of all. DO ensure that what you are investing in the cannabis industry is money you CAN afford to lose. This is an extremely embryonic industry. It is not yet fully developed, regulated and tested.
There are a number of risks you need to think about.
If you're a beginner, try not to buy and sell too often. As mentioned above, there is great volatility in the marijuana market and it is not uncommon for shares to move 20-30% either way in one day.
Thus, if you are buying AND selling frequently, you run the risk of short-term volatility really impacting your potential returns.
Consider rather, picking a few stocks and holding them for the medium term. This way, you hopefully lock in longer-term growth (in what could be a 10-year bull market) and pass over all the short-term volatility.
Do NOT put all of your money into one stock. And certainly not in one go. First off, remember to try and dollar-average down, and secondly, do not pull all your eggs in one basket.
This is a very volatile and nascent industry. There are going to be many, many losers in the medium to long-term. No one can pick only winners. No one. This is why it is always better to have a slightly diversified portfolio.
What we mean by that is a couple of stocks, and each covering perhaps a different area of the market. So, as a starting point, you might have a Canadian LP, a US-focused, multi-state company, an ancillary company, and a hemp company (if you were to choose 4 stocks).
If one stock tanks, but the other 3 do well, you will do well.
Try not to check them daily (although you are going to…multiple times a day…in your first couple of days). It's very exciting. There is nothing like being in the market and actually seeing your shares go up and down (yes – they are going to go down – deal with it).
But there is no point checking them every day. There is simply too much volatility in the market to base any emotion on. They can all go up one day and then all down the next. This is the cannabis market.
So try and check them monthly, or even less. Remember, if you pick right, you are going to be up (and a lot) in 12 to 24 months time. No doubt.
And finally, do NOT trade with your emotions.
You've had a bad day, you had a fight with your partner, and you look at the shares and they are down, for the 6th day in a row!
"That's it," you think. "I am done with this"
And you end up selling all your stocks and taking a loss because you are emotional. Before you do anything in the market (buying or selling) make sure you have thought about it.
The same goes for the upside. Try not to follow the herd. Remember that if the delivery guy dropping off your takeout is telling you about a cannabis pot stock, it's probably too late. So don't get too excited either and rush into the market.
So, you've successfully completed the second chapter of the series on the stock market. We hope that we were able to help you understand the stock markets as a beginner. If there's anything else you want us to cover, drop us a note and we'll be more than happy to incorporate it.
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