When people first hear about the stock market it often comes across as very complicated and overwhelming. All people see in their heads are perplexing graphs, algorithms, complex numbers and $$$ signs. What if I told you that I made my first $100k trading on my iPhone. Hard to believe, right? Stock trading is actually much simpler than it sounds and before I go into how I amounted to that much money I want to answer a few common questions.
How does the stock market work?
I am going to give you a very simple look at the stock market using an exclusive box of pizza. Let’s say this pizza has 10 slices and there are 20 people in the room that all want a slice. You and nine others secure your slice by paying let’s say $10. (One of a kind pizza). Now there are 10 other people in the room that didn’t get a slice and want a piece of the action. They start bidding on the slices. We will say the pizza slice is a stock price. One of the 10 people wanting a slice is offering $15 for a slice. You sell your slice and secure a $5 profit. $15-$10 = $5.
Looking at a bigger picture say out of those 10 slices you were able to buy 5 slices at $10 and the other 5 slices were taken by others in the room. If you were to sell those 5 slices for $15 each, $15*5 = $75. $75 minus your initial investment of $50 ($5 * $10) gives you a total profit of $25.
Now let’s view this in the other direction. You and nine others secured your slice for $10. But the others that want a slice of the pizza do not believe the slice is worth $10. They start bidding for $8 a slice. The value of your slice is now only worth $8 because that is what the buyers believe is the value of the slice. You can decide to sell it for a loss before the bids keep getting lower, or you can decide to wait it out and keep holding because you believe your slice has value.
Essentially what I am implying is that a company stock price is dependent on the bid and asks prices. (Bid: what people are willing to buy the stock for and Ask: what people are willing to sell the stock for). The market price (current price) is usually the in-between of the two numbers. (Bid price/ Ask price)
You can think of every company in the stock market as an individual box of pizza and the current price of the stock is how valuable the public think each slice of this pizza is.
Of course, there is much more to it than just that, I will leave a bunch of links below that I used personally when I started investing. They give a much more detailed look at the stock market and may explain concepts better than I can.
How much do I need to get started?
You can technically start investing right now with only $1 in your bank account. But the truth of the stock market is that you need money to make money. Using my pizza slice example, with only 1 slice you would only get a $5 profit in that scenario. Now imagine if you could had bought 100 slices of the pizza at $10. That would be a $500 profit if you sold for $15!
The average investor gets a ROI (Return on investment) of 10% a year. Breaking that down that’s equivalent to making $10 on an $100 investment…. $100 on a $1000 investment and so on. Remember this is an average return based on profits and losses combined. There are people with over 100% gains in a year and there are people with -75% loss.
How much did you start with?
I started investing three years ago. I interned over the summer at my schools’ IT office and saved a few paychecks and combined that with some money I had made from reselling sneakers which came to a total of $3,000.
What do you use to trade?
I started trading with robinhood which is a completely free and safe way to interact with the stock market. It is available on both apple and android devices and also on pcs. It is very user friendly and simple to setup. I have included links below to sign up for an account and also the support page for any additional questions. I recently moved away from robinhood to TdAmeritrade. As my portfolio got larger and my trading strategy changed I decided to switch. TdAmeritrade offered more analytical tools and also had some additional features robinhood didn’t. TdAmeritrade has a fee of $6.99 per trade so I recommend starting with robinhood first. Robinhood also starts you off with a free stock if you use my invitation link below. If you are lucky you have a chance of receiving a facebook/microsoft/apple share.
What company should I buy?
This is one of the toughest questions I get a lot. My number one rule of investing is to not follow someone’s stock choice blindly. Do your own research and see if that company has a good case. With that being said there are 11 stock sectors in the stock market. My suggestion is to look into each of this sector and see where you trust your money in. I am a big technology guy so 95% of my portfolio is in technology. If you ask any top tier investor they will tell you that that is a bad practice. You are supposed to split your investment into several sectors in case of any crazy event that could cause a sector to crash. I will leave links at the end of the article showing the best performing company in each of these sectors.
1. Financials (Ex. Bank of America)
- Banks, investment funds, insurance companies, etc.
2. Utilities (Ex. National grid)
- Electric/gas/water companies
3. Consumer Discretionary (Ex. Macys)
- Media companies, consumer service providers, apparel companies
4. Consumer Staples (Ex. McDonalds/Coca-Cola)
- Food and beverage companies
5. Energy (Ex. Exxon Mobil Corp)
- Oil/Gas exploration and production companies
6. Healthcare (Ex. Johnson & Johnson)
- Biotechnology companies, hospital management firms, etc
7. Industrials (Ex. Boeing)
- Aerospace, defense, machinery, constructions, etc
8. Technology (Ex. Facebook, Amazon, Google)
- electronics manufacturers, software developers, Information technology firms.
9. Telecom (Ex. T-Mobile, AT&T)
- wireless providers, cable companies, internet services
10. Materials (Ex. Eastman Chemical Co)
- Mining, refining, chemical, etc
11. Real Estate (Ex. Dynex Capital)
- Companies invested in residential, industrial and retail real estate.
Choosing the right company continued..
When you are choosing the company you want to buy, think to yourself and say how is this company going to continue to bring in more revenue each quarter. This is where research comes into play, I spend about 3 hours a day reading articles and digging to see what new innovation is coming down the pipeline from these companies I am interested in. If you have confidence that the company you want to buy has the means to continue their growth then without a doubt go for it.
When should I sell my position?
When you open a new position (Buy shares of a company) always have a game plan set. Know the reason behind why you are buying them and how long you are willing to wait.
If you are buying the stock short term, meaning you aren't really interested in what the company has coming down the road but you want to play the current momentum it has, I would say try to get at least 5% on that position before you sell. If your position starts going down you should have a stop loss set. A stop loss basically tells your broker that if the stock price goes below the price you set automatically sell the position at the current price. This helps limit your loss in case that company suffers a big price crash.
Long term investment is always the most recommended and the safest way to go. When I say long term, I am talking 2years+. With long term investment, you won’t lose any money until you sell, so for example you bought Facebook at $20 and a few weeks later it’s at $10 you haven’t lost that $10 until you close your position. If you have the patience and will power to hold through, there is always a huge chance of the stock price recovering and continuing to go higher. So, with long term investing hold as long as you can until you need the money or there are strong speculation/rumors that the company might be affected soon, then you might want to consider closing your position to be safe.
Can I withdraw my money at any time?
You can sell your position at any time by placing a market order. Once your position is sold it usually takes 2-3 days for your broker (Robinhood) to clear the trade. Once it is cleared you can withdraw directly to your bank account you set the account up with.
Do I have to pay taxes?
In the stock market, any profit is considered taxable gains and must be reported during tax season. Robinhood has a great feature where your tax document is prepared for you automatically and all you have to do is give this document to your tax preparer. If you use an online tax services a lot of companies are starting to take in robinhood documents through an upload button. TurboTax offers this service.
*You do not have to pay taxes on any losses, in fact you can claim up to $3,000 a year on losses from stock investments!*
Why do I have to provide my social security number?
Since stock market profits are taxed, robinhood and any other trading platform will ask you for your social security number. This will tie your gains/losses to you and will get reported to the IRS during tax season. It is completely secure and legal. I have included a link below to explain it a little better.
Ok great, so how did you make 100k?
With 100% honesty, A big factor in succeeding in the stock market is luckiness. Luck in the sense on choosing the right stock at the right time and also getting out of a stock at the right time. I was an aggressive trader with the mindset that I was willing to lose 100% on my initial investment. In the first 3 months of trading I saw my $3,000 investment turn into $750, but I didn’t stop there, I saved up again and restarted with around $2,000. My first jackpot was January 1st 2018, I took on option trading (another form of trading in the stock market) where I saw my fortune rise to $16k. January was a great month in the stock market and a lot of technology stocks sky rocketed during this period, I had put everything into $SQ (square inc) and $NVDA (Nvidia) and the profit for that month was amazing. Like I said earlier in this article the more money you have in the market the more you can make. I was then able to flip that $16k to around $50k by going all in on $NFLX (Netflix) during their earnings report. An earnings report is basically like a report card for each company. Every quarter public companies have to release to their investor how well they did that quarter and how well they believe they will do next quarter. During that quarter Netflix announced a sensational addition of 2 million subscribers on top of what analyst expected. After that play, I took my money out and started trading less aggressively, I invested in several safe haven companies and slowly watch my new $50k investment make it way up to $100k. Still $50k - $100k is a 100% gain, it’s not easy to able to do this in the stock market and that is where luck played in my favor.
***Option trading can get pretty complex and risky so I wouldn’t recommend you jumping directly into it until you are experienced on how regular stock trading works. If you do think you have that down already and want to know more on option trading you can follow me on twitter(@_Mordie) and I can help you get started. **
Thanks for reading!
Some additional links
How the stock market works
What causes stock prices to change
How to invest with Robinhood
Best performing stocks in each sector
© 2018 Mordecai