The stock market can be a scary place for first-time investors. It's not uncommon for people to see stock prices drop and assume that the market is about to crash. However, it's important to remember that the stock market is a great way to grow your money over time. Keep your investing mentality in check and practice sound investing strategies. The stock market can be your best friend — even during trying times. Have you ever peeked at the stock market but felt like there was something you weren't getting? Don't worry; you're not the only one. Many people don't quite understand how trading works and all those weird words. This guide will help explain everything so that you no longer feel like trading stocks is an insider club with its own special language and rules.

What is the stock market?

Simply put, a stock market is where stocks (which are pieces of ownership in companies) are bought and sold. The stock market is a system for companies to raise capital by selling shares (or equity) in their company by going public. You can also buy shares in companies, which will make you part-owner of the companies. You will see a return on investment (ROI) if the company does well. If the company does poorly, you could lose your entire investment. The stock market is the collection of all exchanges where people buy and sell stocks. The New York Stock Exchange is the largest stock market, followed by the Nasdaq. If you're investing in stocks outside of a retirement account, you're probably trading in the stock market.

Why Trade in the Stock Market?

You might wonder why you'd want to trade in the stock market if there's a chance of losing money. Why not invest in less risky things, like bonds or money market funds? The stock market has risk, of course, but it also offers higher potential returns. Over the long term, the stock market has consistently shown the ability to grow your money faster than other investments. Over the last 100 years, stocks have grown an average of 10% yearly. On the other hand, bonds and money market funds have historically grown your money at a slower rate. The downside of the stock market is that it's generally a volatile place to invest. In times of economic uncertainty or when a certain sector of the economy is struggling, stocks tend to fall. This is a good thing, as it allows you to invest in great companies at a lower price — giving you the chance to make a bigger return when the stock bounces back.

The Basics of Paper Trading

- Asset: Anything that can be bought or sold. Examples include stocks, real estate, or commodities such as gold or grain.

- Price: The amount you have to pay for something.

- Sell: When you sell an asset, you're hoping to make a profit.

- Buy: You're hoping to make a profit when you buy something.

- Price per share: The amount it would cost to buy one share of a company's stock.

- Shares outstanding: The total number of shares of a company's stock currently in circulation.

Rule No. 1: Only Paper trade with a plan

Do you have a plan for when you're under pressure? What happens if there's an unexpected drop in the market? If you're going to trade stocks, you need to make sure you can handle the ups and downs of the market. It's important to understand that there is no way to know whether a stock will go up or down. Many factors go into the movement of markets, including the overall economy, political decisions, and news events. This is why stocks are often referred to as a "gamble" or a "risky investment." No one can predict the future. If you don't have a plan for what to do when the market is going up or down, you're probably not ready to start trading stocks. You need to be able to handle the fact that you might be wrong. If you get emotional and make decisions based on fear ("Oh no, the market is going down! I need to sell everything right now!"), you might end up making bad decisions.

Rule No. 2: Only use your virtual cash

If you're just starting out with trading, you may feel like you need a big amount of money to get started. After all, you see people bragging about how much money they made on a certain stock. However, the truth is that you don't need a lot of money to trade stocks. In fact, the best thing to do when you're just starting out is to only use the money you can afford to lose. You should only use the money you're willing to lose because you probably don't have the experience needed to know which stocks are likely to go up or down. You might end up buying shares in companies that are not good investments. Or, you might buy a stock that's likely to go down, but you don't know yet. Trading with money you're willing to lose will help you stay focused on having fun with the process. So, we advise you to do paper trading with little virtual money to get good practice.

Rule No. 3: Only paper trade a few stocks you know well

When you're just starting out, you don't want to load up on stocks you don't know anything about. If you have 10 stocks in your portfolio, it's hard to know what each company is doing. You need to pick 2 or 3 stocks you understand and can talk about. When you know a lot about a specific company, it's easier to figure out if they're doing well. When starting out, it's helpful to pick stocks that are easy to understand. You're not ready to trade if you get confused by the numbers on the screen. For example, Coca-Cola is a great company to start with. They sell a lot of products around the world, and they're a well-established brand.

Rule No. 4: Don't rely only on your emotions during paper trading

Investing is all about risk-reward. You need to understand what you stand to gain and lose on each stock you buy. You can do this by using online tools to get information on companies, such as their revenue, earnings, and other data that can help you make decisions. However, no matter how much research you do, you're always taking a risk when you invest. You simply can't predict the future. This is why you must keep your emotions in check when trading stocks. You might have a lot of excitement and confidence in a stock because you've done your research, and it seems like a good investment. However, the best thing to do is to limit how much virtual money you're willing to lose on that stock during paper trading.

Rule No. 5: Only do paper trading with what you know

This is similar to Rule No. 3: only trade stocks, you know. When you know about a company, it's easier for you to decide about that stock. You're less likely to panic if the price goes down or if you get bad news about the company. It's also easier to find information about the company, which is important when deciding when to sell. If you only trade stocks in industries you know well, you'll feel more confident in your investments. You'll likely be able to make better decisions, and you won't get as emotional when things go wrong.

Conclusion

There are risks associated with trading stocks that you will find out during paper trading. Understanding the risks is important so you can make smart decisions when trading. The main risks involve losing money. When you trade stocks, there's a chance that you'll lose money. There are no guarantees when it comes to stocks. You could lose money on every stock you buy if the prices fall.