Consider this the biggest milestone so far in your successful trading career. If you're here by accident, we suggest you go back and read "A Beginners Guide to Shares" to catch you up to speed.
This is a detailed guide for those looking to trade pot stocks on the global stock market exchanges. Sound daunting? It's actually much easier than you think.
Before you set off into the big, bad world of trading, you will need to understand the stock market, also known as the share market, in order to better identify long-term gains, efficiently manage risks, and learn how to keep the odds in your favour.
What are stocks?
If you're here by accident and you still haven't gone back to read "A Beginners Guide to Shares", well you're in luck – because we're going to summarise the entire article in just a few sentences (DISCLAIMER: you should probably still read Part 1 of this series, which relates to Shares themselves).
In simple terms, a stock or share represents a small portion of a company (as a 'share of the company' would indicate). If you purchase a share on the stock market, you essentially own a proportional share of that company.
In other words, you can own a part of any company you love, such as Canopy Growth (NYSE:CGC) or CannTrust (OTC:TRST), or the now infamous cannabis company, Aphria (NYSE:APHA) by buying shares of these listed companies, on the stock market.
What is a stock market?
Different from a farmer's market, a stock market is a complex public platform where the shares or stocks of publicly-listed businesses are bought, sold, and listed. While some people compare it to gambling, trading on the stock market is not really the same (although some forms of share derivative trading are slightly akin to gambling, but that's for another day!)
For starters, the saying "the house always wins" doesn't apply to the stock market. Nobody is purposefully stacking the odds against you, and nobody profits from you losing your money.
In another scenario, let's say you put $50 on a single roll of the dice. If you win, you get a certain dollar return on this wager; if you lose, you lose the entire $50. However, on the stock market, the scenario is different.
You either gain $X as a percentage increase in your investment or lose $Y as a percentage of your investment; you rarely lose everything, provided the business you invest in doesn't go bankrupt.
Simply put, the stock market is a platform where a group of buyers and sellers trade with each other using their expertise. There are many stock markets around the world, the largest examples being the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), the Tokyo Stock Exchange (TSE), and the massive-tech oriented NASDAQ. Almost every country has its own regulated stock exchange.
What is the role of a broker in the stock market?
No, they don't break things. A broker helps you buy and sell stocks on the stock exchange. Many brokers also advise you on market trends, the best stocks to buy, the best stocks to sell, and how to diversify, among other advice. They are experts in the field of stocks. You'll be required to pay a brokerage fee to avail yourself of 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 buyers, the sellers, and the companies. A lot of stock market trading these days is done by supercomputers, called Program Trading, or through brokers who charge a trading fee for performing the program trading on your behalf.
Most people find it relatively easy to trade online using computers. In fact, according to a report by JP Morgan, it has been found that human traders (brokers) now form only 10% of the daily stock market trading activities.
How are they set?
You might be glad to know there isn't a Martin Shkreli pumping up the prices of stocks … well, maybe there is, but you can always buy different stocks somewhere else at a more reasonable valuation. For the most part, the set price of stocks is based on the supply and demand method, or the bid-and-offer method.
In the case of the former, the amount that people are generally willing to pay for a share is dictated by how much they believe it will be worth in the future. The amount they may have to pay is set by seller expectations and how readily available the stock is, i.e. whether there are sellers looking to sell at this price (this is where Trading Volume comes in and why it is so important).
This is the supply of the shares available to purchase and will dictate the offer price. An abundance of supply, i.e. lots of sellers and fewer buyers, will drive the price down.
In the case of the latter, a bid is usually the highest amount a buyer is willing to pay for a share, while an ask is usually the amount a seller is willing to sell their shares at. The difference between the bid and the offer price is the strike price (i.e. the exact price that a buyer and seller agree on) and determines the price of the stock.
The other factors that influence the prices of shares include:
- Opinions of significant investors (i.e. those that a lot of shares in the company)
- Growth expectations of the company
- Future prospects
- Number of buyers and sellers
- The media
- Macro Events such as social/political unrest and natural disasters
What is market capitalisation?
Market capitalisation simply refers to the total money it would cost to purchase each and every stock of a company at the current stock market price.
Market Capitalization = Total available stocks x Current stock market price
For instance, if a company "ABC" has 10,000 shares of outstanding stock and the stock is trading at $50 per stock, the market capitalisation of that company would be 10,000 x $50 = $50,000. On the stock market, the market capitalisation of ABC would be referenced as $50,000.
When is the right time to buy into the stock market?
If we knew the answer to this, we'd all be billionaires and chilling in the Maldives. Most stock market experts will say that it's impossible to predict the stock market. While this is partially true, there are strategies to identify major outliers in stock market trends and when and where they emerge.
By spotting these trends and tracking them, you can reap profits during a critical market uptrend phase and keep the profits when the stock market enters a downturn phase. Spotting trends, is understanding the overall market and how your chosen companies might fare in their industry or channel.
The Green Fund has an entire section dedicated to Trends and what is trending in the industry. Keep yourself in the know.
Investing vs. Trading
Here's a quick test of your recall skills – if you still haven't read "A Beginners Guide to Shares", then go back and read it now! If not, fine. We're about to recap the basic difference between investing and trading on a stock market anyway:
In the case of "investing", a person holds the stock for the long-term to gain profits over time. It comes with less risk (ignores volatility) and is a smart long-term gains strategy. Conversely, in the case of "trading", a person looks to make profits quickly by buying and selling highly volatile shares rapidly. There is usually higher risk involved in trading and it takes careful and diligent monitoring of the stock market to pull it off successfully.
Why should you invest in the stock market?
All this information is worthless if you don't know why you should be investing in the stock market. If you're looking for a steady, secondary income and some corporate sway to boot, then investing in the stock market is the perfect option.
It is a proven statistic that a market generally rises, and this means investment gains over time that are generally higher than less risky investments such as government savings bonds or bank account interest.
For starters, long-term trading allows you to gain a profitable position on the stock market over weeks, months, or even years. This becomes a healthy source of passive income, which is like getting a nice bonus on your wages without needing to lift a finger.
Unlike trading, where you are constantly monitoring the market and opening and closing new trade accounts, an investment is a wise move that generally works for you over the long-term.
Moreover, investing is an excellent saving strategy. Instead of spending here and there, you're essentially holding onto your savings with higher interest rates than the 0.01% interest you're making from your everyday savings account. Are we done here?
The Do's and Don'ts of investing in the stock markets
When investing, there are a few stock market do's and don't's that you must keep in mind. If you're a beginner, don't overlook this part! Here are some more to keep in mind:
The Sure Shot Do's
- Rule #1 – the most important rule of all. No rule is more IMPORTANT than this one….
DO NOT INVEST MONEY YOU CANNOT AFFORD TO LOSE!
- Rule #2 – Read Rule #1 again and make sure you understand it.
- Investing should be a fun experience. If the market does go down, you cannot allow yourself to lie in bed awake at night, worrying. Only invest funds that you can afford to, and that in the worst possible case, you could afford to lose.
- One way to do this is to invest slowly. Save a couple of hundred bucks every month and invest them in the market. This way you know you can afford it, and it helps you dollar average in.
- Always work with stock market brokers who are registered with the market authorities. Only registered brokers can participate in the relevant exchange and are licensed by an overseeing body.
- Ensure clear communication with your stock market broker. You can't take back orders once placed!
- If you are using an online trading platform, ensure you first learn how it works. Try a few practice trades and watch the tutorials. They are really easy to watch
- Avoid stocks showing sudden uptrends and downtrends. These usually signal volatile stocks and it means that there is no long-term guarantee that the price will stay steady either way. Higher volatility is a euphemism for higher risk.
- Before investing, make sure you research and analyse potential stocks thoroughly. For example, check that the company you want to invest in. Is it the best at what it does?. Do they have a unique selling proposition? Can they execute? If you're looking to invest in Bing, make sure there isn't a Google outperforming them!
- Maintain a tracker for all your investments. This will help you budget, track, and/or automate your share investments. Most broker platforms provide you with these tools as part of the service.
- Make sure you have an emergency fund in case of a crisis (financial or otherwise).
- Start your investment journey with low-cost investments. Don't spend all your money right away – work your way up once you feel comfortable. This is called Dollar Averaging Down.
- Invest only in the companies that you understand (a famous Warren Buffett axiom – of course, that is why he didn't buy Google!) – that way, you can make sure they have a practical and sustainable business model. If you're not sure why people are overpaying for tulips, then don't invest in tulips.
The Critical Don'ts
- Rule #1 – DO NOT INVEST MONEY YOU CANNOT AFFORD TO LOSE!
- Don't indulge in frequent buying and selling of stocks. There is a cost to buying and selling shares such as brokerage fees and this can eat away at your returns.
- Avoid putting all your eggs in one basket. Diversify your investments to make the most out of your money.
- Avoid checking the numbers daily for peace of mind, but do check your investment status once in a while.
- Avoid spending more than you earn. This should be pretty self-explanatory, but if you don't have the money then don't dig yourself a deeper hole. If you don't have sufficient funds to invest, don't borrow money and take on more debt. There is no guarantee that you will be able to recoup your investment.
- Do not let your emotions take over your strategy. In other words, don't invest in underperforming stocks just because you like the company more. Make smart, calculated decisions.
So, you've successfully completed the second chapter of the Green Fund's series on stock markets. By now you should have a pretty solid understanding of how stock markets work. If not, continue to read and learn until you are. Because when you are, you now have the opportunity to actually enter the game.
The Global Marijuana Greenrush – the greatest investment opportunity since the dawn of the Internet in the early '90s. But it's both volatile and nascent, and hence comes with significant volatility. So strap yourself in, as this is one bumpy ride.
But most importantly of all – a bumpy ride…uphill!!!
If there's anything else you want us to cover, drop us a note and we'll be more than happy to incorporate it in our next briefing. Stay focused. Stay hungry.
And they told you money doesn't grow on trees.