Investing in the Stock Market

Foreword

Over the past few years the stock market has made substantial declines. Some short term investors have lost a good bit of money. Many new stock market investors look at this and become very skeptical about getting in now.

If you are considering investing in the stock market it is very important that you understand how the markets work. All of the financial and market data that the newcomer is bombarded with can leave them confused and overwhelmed.

The stock market is an everyday term used to describe a place where stock in companies is bought and sold. Companies issues stock to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. The investors who buy this stock now own a share of the company. If the company does well the price of their stock increases. If the company does not do well the stock price decreases. If the price that you sell your stock for is more than you paid for it, you have made money.

When you buy stock in a company you share in the profits and losses of the company until you sell your stock or the company goes out of business. Studies have shown that long term stock ownership has been one of the best investment strategies for most people.

People buy stocks on a tip from a friend, a phone call from a broker, or a recommendation from a TV analyst. They buy during a strong market. When the market later begins to decline they panic and sell for a loss. This is the typical horror story we hear from people who have no investment strategy.

Before committing your hard earned money to the stock market it will behoove you to consider the risks and benefits of doing so. You must have an investment strategy. This strategy will define what and when to buy and when you will sell it.
History of the Stock Market

Over two hundred years ago private banks began to sell stock to raise money to expand. This was a new way to invest and a way for the rich to get richer. In 1792 twenty four large merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet daily on Wall Street and buy and sell stocks.

By the mid-1800s the United States was experiencing rapid growth. Companies began to sell stock to raise money for the expansion necessary to meet the growing demand for their products and services. The people who bought this stock became part owners of the company and shared in the profits or loss of the company.

A new form of investing began to emerge when investors realized that they could sell their stock to others. This is where speculation began to influence an investor’s decision to buy or sell and led the way to large fluctuations in stock prices.

Originally investing in the stock market was confined to the very wealthy. Now stock ownership has found it’s way to all sectors of our society.
What is a Stock?

A stock certificate is a piece of paper declaring that you own a piece of the company. Companies sell stock to finance expansion, hire people, advertise, etc. In general, the sale of stock help companies grow. The people who buy the stock share in the profits or losses of the company.

Trading of stock is generally driven by short term speculation about the company operations, products, services, etc. It is this speculation that influences an investor’s decision to buy or sell and what prices are attractive.

The company raises money through the primary market. This is the Initial Public Offering (IPO). Thereafter the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the shares to each other. The company is not involved in any profit or loss from this secondary market.

Technology and the Internet have made the stock market available to the mainstream public. Computers have made investing in the stock market very easy. Market and company news is available almost anywhere in the world. The Internet has brought a vast new group of investors into the stock market and this group continues to grow each year.
Bull Market – Bear Market

Anyone who has been following the stock market or watching TV news is probably familiar with the terms Bull Market and Bear Market. What do they mean?

A bull market is defined by steadily rising prices. The economy is thriving and companies are generally making a profit. Most investors feel that this trend will continue for some time. By contrast a bear market is one where prices are dropping. The economy is probably in a decline and many companies are experiencing difficulties. Now the investors are pessimistic about the future profitability of the stock market. Since investors’ attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.

In a bull market the investor hopes to buy early and hold the stock until it has reached it’s high. Obviously predicting the low and high is impossible. Since most investors are “bullish” they make more money in the rising bull market. They are willing to invest more money as the stock is rising and realize more profit.

Investing in a bear market incurs the greatest possibility of losses because the trend in downward and there is no end in sight. An investment strategy in this case might be short selling. Short selling is selling a stock that you don’t own. You can make arrangements with your broker to do this. You will in effect be borrowing shares from your broker to sell in the hope of buying them back later when the price has dropped. You will profit from the difference in the two prices. Another strategy for a bear market would be buying defensive stocks. These are stocks like utility companies that are not affected by the market downturn or companies that sell their products during all economic conditions.
Brokers

Traditionally investors bought and sold stock through large brokerage houses. They made a phone call to their broker who relayed their order to the exchange floor. These brokers also offered their services as stock advisors to people who knew very little about the market. These people relied on their broker to guide them and paid a hefty price in commissions and fees as a result. The advent of the Internet has led to a new class of brokerage houses. These firms provide on-line accounts where you may log in and buy and sell stocks from anywhere you can get an Internet connection. They usually don’t offer any market advice and only provide order execution. The Internet investor can find some good deals as the members of this new breed of electronic brokerage houses compete for your business!
Blue Chip Stocks

Large well established firms who have demonstrated good profitability and growth, dividend payout, and quality products and services are called blue chip stocks. They are usually the leaders of their industry, have been around for a long time, and are considered to be among the safest investments. Blue chip stocks are included in the Dow Jones Industrial Average, an index composed of thirty companies who are leaders in their industry groups. They are very popular among individual and institutional investors. Blue chip stocks attract investors who are interested in consistent dividends and growth as well as stability. They are rarely subject to the price volatility of other stocks and their share prices will normally be higher than other categories of stock. The downside of blue chips is that due to their stability they won’t appreciate as rapidly as compared to smaller up-and-coming stocks.
Penny Stocks

Penny Stocks are very low priced stocks and are very risky. They are usually issued by companies without a long term record of stability or profitability.

The appeal of penny stock is their low price. Though the odds are against it, if the company can get into a growth trend the share price can jump very rapidly. They are usually favored by the speculative investor.
Income Stocks

Income Stocks are stock that normally pay higher than average dividends. They are well established companies like utilities or telephone companies. Income stocks are popular with the investor who wants to own the stock for a long time and collect the dividends and who is not so interested in a gain in share price.
Value Stocks

Sometimes a company’s earnings and growth potential indicate that it’s share price should be higher than it is currently trading at. These stock are said to be Value Stocks. For the most part, the market and investors have ignored them. The investor who buys a value stock hopes that the market will soon realize what a bargain it is and begin to buy. This would drive up the share price.
Defensive Stocks

Defensive Stocks are issued by companies in industries that have demonstrated good performance in bad markets. Food and utility companies are defensive stocks.
Market Timing

One of the most well known market quotes is: “Buy Low – Sell High”. To be consistently successful in the stock market one needs strategy, discipline, knowledge, and tools. We need to understand our strategy and stick with it. This will prevent us from being distracted by emotion, panic, or greed.

One of the most prominent investing strategies used by “investment pros” is Market Timing. This is the attempt to predict future prices from past market performance. Forecasting stock prices has been a problem for as long as people have been trading stocks. The time to buy or sell a stock is based on a number of economic indicators derived from company analysis, stock charts, and various complex mathematical and computer based algorithms.

One example of market timing signals are those available from http://www.stock4today.com.
Risks

There are numerous risks involved in investing in the stock market. Knowing that these risks exist should be one of the things an investor is constantly aware of. The money you invest in the stock market is not guaranteed. For instance, you might buy a stock expecting a certain dividend or rate of share price increase. If the company experiences financial problems it may not live up to your dividend or price growth expectations. If the company goes out of business you will probably lose everything you invested in it. Due to the uncertainty of the outcome, you bear a certain amount of risk when you purchase a stock.

Stocks differ in the amount of risks they present. For instance, Internet stocks have demonstrated themselves to be much more risky than utility stocks.

One risk is the stocks reaction to news items about the company. Depending on how the investors interpret the new item, they may be influenced to buy or sell the stock. If enough of these investors begin to buy or sell at the same time it will cause the price to rise or fall.

One effective strategy to cope with risk is diversification. This means spreading out your investments over several stocks in different market sectors. Remember the saying: “Don’t put all your eggs in the same basket”.

As investors we need to find our “Risk Tolerance”. Risk tolerance is our emotional and financial ability to ride out a decline in the market without panicking and selling at a loss. When we define that point we make sure not to extend our investments beyond it.
Benefits

The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!

The Internet has make investing in the stock market a possibility for almost everybody. The wealth of online information, articles, and stock quotes gives the average person the same abilities that were once available to only stock brokers. No longer does the investor need to contact a broker for this information or to place orders to buy or sell. We now have almost instant access to our accounts and the ability to place on-line orders in seconds. This new freedom has ushered in new masses of hopeful investors. Still this in not a random process of buying and selling stock. We need a strategy for selecting a suitable stock as well as timing to buy and sell in order to make a profit.
Day Trading

Day Trading is the attempt to buy and sell stock over a very short period of time. The day trader hopes to cash in on the short term fluctuations in a stock’s price. It would not be unusual for the day trader to buy and sell the same stock in a matter of a few minutes or to buy and sell the same stock several times a day.

Day traders sit in front of computer monitors all day looking for short term movement in a stock. They then attempt to get in on the movement before it reverses. The real day trader does not hold a stock overnight due to the risk of some event or news item triggering the stock to reverse direction. It takes intense concentration to monitor the minute by minute movement of several stocks.

Day trading involves a great deal of risk because of the uncertainty of the market behavior over the short term. The slightest economic or political news can cause a stock to fluctuate wildly and result in unexpected losses.

There are a few people who make respectable gains day trading. The people who probably make the most are the self proclaimed “experts” who sell the books or operate the web sites that cater to the day trader. Because of the profits to be made from sales to people who want to get rich quick, they make it seem as attractive as possible. The truth is that in the long run more people lose than gain by day trading. This does not translate into a very good investment.

Stock Market Basics For Beginners – All You Need To Know

Rookie stock market investors are those who only possess a relatively rudimentary knowledge and experience in the investing sphere. Most of these individuals usually commence by sticking to a ‘buy and hold’ trading strategy. As a beginner, your general experience in stock market investment trading is very limited. This, for the most part, confines you to making no more than a couple of trades perhaps on a monthly basis from a cash account. However, this does not necessary signify that you have not placed high expectations on your stock market trading activities. You most likely are very interested in expanding your knowledge as well as investment experience in order to realize the objectives you may have set. This is all nice and good.

Nevertheless, most beginners are generally totally ignorant on the exact time investment and devotion required in investing and trading. This makes a large number of them to be extremely susceptible of initiating failed investments. The kind of stock market investments which are based purely on instincts and hearsay, rather than investments that are based on actual research.

Most rookies usually comprehend the notion of buying low and then selling high. Still, they are very prone to letting their emotions guide their actions, the moment a trade or investment has been made. As a result, many of them can desperately cling to securities resulting in substantial losses. Mind you, even when the exact reasons that drove them to make the initial investment in a particular security become untenable. As such, most of them find themselves hoping or anticipating that a ‘losing’ stock will be able to recover for them to be in a good position of getting back even. In the event higher prices emerge, these beginners then opt to pull out way to soon. This normally prompts them to sell their stocks at break even or perhaps after they have only realized insignificant profits.

Generally speaking, it is always tough for rookies to discern a forest from just trees. Also, they find it hard to recognize if the future prospects of any particular security are auspicious, even if the short term trading trends are not volatile. Beginners are normally successful during strong ‘bull’ markets. But unfortunately find themselves clueless on tougher occasions, especially when market volatility is higher and ‘bears’ happen to rule. Well, if you deeply feel you fit this description to the T, here then are some stock market investment basics for beginners, which could be useful.

Make it a point to set realistic trading objectives
Before you decide to make your very first investment, try to ask yourself the following questions. “At what point will you require the money you have invested?” “Will it be after 6 months, a year, 5 years or perhaps much longer?”, “Are you trying to lay a nest egg for your sunset years?”, “Are seeking to obtain the necessary funds to finance your college education or perhaps seeking money to buy a home?” “On the other hand, do wish to establish an estate that you want to leave for your beneficiaries upon your demise?”

Whichever the case, prior to making any investment, you ought to fully determine your primary driving motivation. When you have ascertained this critical point, next consider the most likely time in the future you might stand in need of the funds you wish to invest. Should you require your investment back within just a couple of years, then it will be much better to consider another investment channel. It is very important for you to fully understand that the stock market with its volatility can offer no guarantee on just when your investment will be made available.

Accordingly, you should always make it a point to calculate beforehand how much cash you wish to invest and what kind of ROI you may deem suitable to realize your trading objectives. As a rule of thumb, always recall that the eventual growth of your stock market portfolio relies on 3 interdependent factors. These are the exact capital you decide to invest, the amount of yearly earnings on your investment. And lastly, the exact number of years you wish to invest your capital in the stock markets.

Take the necessary time to effectively determine your risk tolerance
Risk tolerance happens to be a psychological attribute, which is genetically oriented. Yet, it can still be significantly influenced by factors such as education, income or even wealth. The moment all these factors increase in value, risk tolerance also tends to rise. Basically, your exact level of risk tolerance can be accurately described as how you feel about any risk you make. As well as the exact level of anxiety you tend to experience whenever you decide to undertake risky ventures. Take your time to ask yourself, “Can I risk $100 to gain $1,000 or perhaps $1000 to gain $1,000?”

It is vital for you to fully understand that all people possess varying levels of risk tolerance. This certainly means that there is no such thing as ‘right balance’ in this given issue.

At the same time, risk tolerance can generally be influenced with the exact ‘perception’ of the risk an individual is contemplating to take. This given concept of risk tolerance is then the most accurate when it comes to stock market investmentt or trading. As you become well conversant with the basics of trading, you will find that the idea of the risks involved in such matters is generally lesser. This includes having an excellent understanding of how to buy and sell stocks, assessing market volatility (price changes). Along with the ease or difficulties of liquidating stock market investments.

This usually leads to a lessening of the overall anxiety you are bound to experience when you trade or invest in the stock market, due to your ‘perception’ of the risks involved. So, by taking the necessary time to fully understand your exact risk tolerance, you will be able to avoid trading in investments you dread. Ideally, you should not invest in an asset which has the potential to cause you sleepless nights. Anxiety triggers fear that in its turn prompts an emotional response to the stressor. By always retaining a cool head during stock market uncertainty, you will be able to adhere to an ‘unemotional’ decision-making process in your stock market activities.

Make it a habit to keep off your emotions from your investments
By far the largest obstacle quite a large number of beginners have to routinely face is their inability to regulate their emotions and proceed to make logical decisions. In the short term, the prices of company stocks correspond with the combined emotions of the whole investment community. When most stock market investors happen to be anxious about a particular firm, its stock prices will be bound to take a plunge. Alternatively, when most traders possess a positive perspective to a firm, its stock prices will naturally rise.

Those individuals who retain a negative perspective about the stock market are known as ‘bears’. While those that have positive outlooks to the same are known as ‘bulls.’ During market hours, the unceasing struggle between bulls and bears is usually reflected on the constantly fluctuating securities’ prices. These short term fluctuations generally arise from rumors, speculations and in some cases even hope. All of these factors can be rightly labeled as been emotions. Effective stock market investment necessitates a logical and systematic analysis of a company’s assets, management and future prospects.

At this juncture, it is important for you to remember that stock market prices can move in contrast to most expectations. For the inexperienced, this can fuel insecurity and tension. At such moments, you will find yourself faced with a dilemma – “Should you sell your position to prevent a loss?”, “Or should you continue maintaining your position in the hope that the prices will ultimately rebound?” Even in the occasions that prices perform as you expected, you will still find yourself facing troubling questions. “Should you take a profit now prior to the prices falling?”, “Or should you maintain your position as the prices could rise even higher?”

Dealing with all these perplexing thoughts can trigger a lot of worry, particularly if you constantly monitor the prices of the securities you trade in. This emotion can eventually prompt you take certain actions. As your emotions are the main motivation, it is mostly likely your action will be wrong. When you buy a stock, you should only do so for valid reasons. Also, you should have realistic expectations of exactly how the prices will perform if your guiding reasons prove to be accurate. Finally, before investing in any stock, always take time to determine the exact point you will liquidate your holdings, especially if your reasons are proven wrong. All in all, always have an appropriate ‘exit’ strategy prior to purchasing any stock, and make it a point to execute it unemotionally.

Make it your business to comprehensively learn about the basics of stock market investment
Prior to making your very first stock market investment or trade, make sure that you fully understand all the basics of stock market together with the individual securities which make them up. Below are some of the most pertinent areas you will be obliged to be well conversant with before commencing any stock market activities.

To begin with, take time to understand the exact financial metrics as well as definition that are utilized in stock market trading. Some of the most notable of which are P/E ratio, earnings / share, return on equity and compound annual growth rate. Take you time to fully grasp how these metrics are usually calculated. It is important to state that been in a position of effectively contrasting just how companies use these metrics is essential in any successful stock market investment operations.

Next you should learn all about the most popular techniques of stock selection and timing. To this end, you should make it a point to understand how fundamental and technical analysis can be executed. More importantly, just how they vary and when it is appropriate to use them in a stock market trading strategy. You should also be well conversant with the different types of stock market orders. Take all the time you require to fully comprehend just how market orders, limit orders, stop market orders, stop limit orders and trailing stop loss orders vary from each other.

Finally, you should make it a point to learn all you can on the different kinds of stock market investment accounts which are made available. You perhaps are well conversant with cash accounts that are arguably the most prevalently used by stock market investors. Nevertheless, what are known as margin accounts are by regulations, required when you wish to make some specific types of stock market trades. So, make sure you fully understand how margin accounts can be calculated. You should also find out about the exact differences between initial and maintenance margin accounts prerequisites.

Make it a point to diversify your stock market investments
The moment you have performed all the necessary research that helps you determine and even quantify risk, making the decision to diversify your stock market portfolio can be a very shrewd step. The same is also the case, when you are totally ‘comfortable’ that you will be able to pinpoint any potential danger which might jeopardize your position in a stress-free manner. In both scenarios, you will be able to liquidate your stock market investments prior to sustaining any dangerous loss.

Therefore, the most prudent means of been able to effectually manage stock market investment risks is to diversify your exposure. You should know that most shrewd stock market investors, make it their business to own stocks from different firms, different sectors and even different nations. The primary driving force which motivates them to do so is the firm guarantee that a single inauspicious event can never influence all their holdings. What all this really boils down to is the undeniable fact that stock diversification can allow to comfortably recover from the loss of a single and even several of your investments.

How to Excel in the Stock Market

Stick to the basic rules of stock trading to succeed in the stock market.

The crucial step for good results in the stock market is to be patient and adhere to the market acutely so that you don’t miss any opportunity to make profitable trades. In this article we are introducing some powerful suggestions for successful trades in the stock market.

Determining a trading strategy- For stock market trading and to convert your trades to revenue, it is crucial that you have got a well considered strategy for investment. It will help you to acquire the correct trading options at the right time. Additionally, if you can comply with your method faithfully, you can surely conquer the losses at the stock market and keep your persistence even when the market is going through terrible times.

Possessing a long or short term trading approach – Having a long or short term perspective of the stock market often helps to plan your trading. Even if you are undertaking day trading, you should look at a longer viewpoint as it will let you prepare your investment according to the trend of the up and down of the stock price. Furthermore, a long term evaluation of the stocks will allow you to have a thorough idea of the cyclic ups and downs of the stock and ultimately you can prepare your investment more successfully.

Creating the right selection of stocks – Selecting the right stocks is without doubt the primary condition for generating a profitable investment in the stock market. The key for successful trading is choosing the stocks that are more than likely to rise in the future or fall if your shorting. The most efficient and tested techniques for assortment of the stocks is fundamental analysis. In fundamental analysis factors like earnings, debt and asset of the company is deemed to figure out how strong the stock is. As an investor or trader you should select the stocks that have history of producing steady profit, low debt and greater assets as these are the stocks that are financially stronger and almost certainly to give good returns in the future. The best way to comprehend the potential of a certain stock is to assess the annual and quarterly reports that are published by all the publicly traded companies.

Executing the trades at the right time – Other than selecting the right stocks, it is also important to figure out the right time to invest in that stock. This is essential as every stock has an optimum price for a given time frame. If that stock has already obtained that level, it would not be a smart choice to invest in that stock at that specific time as that stock is not going to go further up in the near future and you ought to wait for the next chance to invest in that stock. However, if you notice that the stock is yet to achieve its potential price level, you can profit by investing in that company. To discover the right time for investing in a particular stock, it is ideal to technically analyze the stock. The technical analysis is a technique where the price level and volume of trading is considered for determining the best price level of the stock for a particular time.

Producing good use of the stop loss mechanism – When all is said and done, you may never be certain of the stock market fluctuations. Sometimes a potentially great stock can see a reverse trend at any point of time. So while trading in the stock market, you should always be ready to deal with any scenario and the stop loss mechanism is one such way to minimize your loss when the stock is showing reverse trend.