In recent years, the stock market has made substantial declines. Some short-term investors have lost a lot of their money. A lot of new stock investors are watching this and are getting very skeptical about entering now.
If you are planning to invest in the stock market, it is very important that you understand how the markets work. All the financial and market data the newcomer is bombarded with can leave them confused and overwhelmed.
The stock market is a common term used to describe a place where stocks of companies are bought and sold. Companies issue shares to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. Investors who buy these shares now own a share of the company. If the company does well, the price of its shares goes up. If the business is not doing well, the share price goes down. If the price you sell your stock for is more than what you paid, you made money.
When you buy shares in a company, you share the profits and losses of the company until you either sell your shares or the company goes out of business. Studies have shown that long-term ownership is 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 in a strong market. When the market later begins to decline, they panic and sell at a loss. This is the typical horror story we hear from people who don't have an investment strategy.
Before committing your hard earned money to the stock market, it will behoove you to consider the risks and rewards 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 selling stocks to raise funds for growth. It was a new way to invest and a way for the rich to get richer. In 1792, twenty-four major merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet on Wall Street daily and buy and sell stocks.
In the mid-1800s, the United States was growing rapidly. Companies have started selling stocks to raise funds for the expansion needed to meet the growing demand for their products and services. The people who bought these shares became part owners of the company and shared the profits or losses of the company.
A new form of investing began to emerge when investors realized that they could sell their shares to others. This is where speculation began to influence an investor's decision to buy or sell and set the stage for large swings in stock prices.
Originally, investing in the stock market was reserved for the very rich. Now, share ownership has found its way into all areas of our company.
What is an action?
A share certificate is a piece of paper declaring that you own a part of the business. Companies sell stocks to finance expansion, hire staff, advertise, etc. In general, selling stocks helps businesses grow. People who buy the share of shares in the profits or losses of the business.
Trading in stocks is usually motivated by short-term speculation in operations, products, services, etc. of business. It is this speculation that influences an investor's decision to buy or sell and what prices are attractive.
The company raises funds in the primary market. This is the Initial Public Offering (IPO). Subsequently, the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the stock to each other. The company does not participate in any profit or loss in this secondary market.
Technology and the Internet have made the stock market accessible to the general 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 to the stock market and this group continues to grow every year.
Bull market – Bear market
Anyone who has followed the stock market or watched the news on TV is likely familiar with the terms bull market and bear market. What do they mean?
A bull market is defined by a constant rise in prices. The economy is booming and businesses are generally making a profit. Most investors believe this trend will continue for some time. In contrast, a bear market is a market where prices fall. The economy is probably in decline and many businesses are struggling. Now, investors are pessimistic about the future profitability of the stock market. Since investor attitudes tend to motivate their willingness to buy or sell, these trends normally continue until significant external events occur to cause a reversal of opinion.
In a bull market, the investor hopes to buy early and hold onto the stock until it hits its high level. Obviously, it is impossible to predict the low and the high. Since most investors are "bullish" they make more money in the rising bull market. They are willing to invest more money as the stock grows and make more profit.
Investing in a bearish market comes with the greatest possibility of losses as the trend is down and there is no end in sight. An investment strategy in this case could be short selling. Short selling is selling a stock that you don't own. You can make arrangements with your broker to do this. This is because you will be borrowing stocks from your broker and selling them in the hopes of buying them back later when the price drops. You will benefit from the difference between the two prices. Another strategy for a bear market would be to buy defensive stocks. These are stocks such as utility companies that are unaffected by the market downturn or companies that sell their products in all economic conditions.
Traditionally, investors bought and sold stocks through large brokerage firms. They called their broker who transmitted their order to the exchange room. These brokers also offered their services as securities advisers to people who had very little knowledge of the market. These people relied on their broker to guide them and therefore paid a high price in commissions and fees. The advent of the internet has led to a new category of brokerage houses. These companies provide online accounts that you can log into and buy and sell stocks from anywhere you can get internet connection. They usually don't offer any market advice and only provide order execution. The internet investor can find great deals as members of this new generation of electronic brokerage firms compete for your business!
Stocks of blue crisps
Large, well-established companies that have demonstrated good profitability and growth, paying dividends, and providing quality products and services are called blue-chip stocks. They are generally the leaders in their industry, have been around for a long time, and are considered to be one of the safest investments. Blue-chip stocks are included in the Dow Jones Industrial Average, an index made up of thirty companies that are leaders in their industry groups. They are very popular with private 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 stock price will normally be higher than that of other classes of stocks. The downside of blue chips is that due to their stability, they won't appreciate as quickly as smaller and future stocks.
Penny Stocks are very low priced stocks and are very risky. They are generally issued by companies without a history of long-term stability or profitability.
The appeal of penny stocks is their low price. While the odds are stacked against it, if the company can enter a growth trend, the stock price can jump very quickly. They are generally favored by the speculative investor.
Income stocks are stocks that normally pay higher than average dividends. They are well established businesses like utilities or telephone companies. Income stocks are popular with the investor who wants to hold the stock for a long period of time and receive dividends and is not so interested in a gain in the price of the stock. .
Sometimes a company's earnings and growth potential indicate that its stock price should be higher than it is currently trading at. These stocks are said to be stocks of value. For the most part, the market and investors have ignored them. The investor who buys a value stock is hoping that the market will soon realize how great a deal it is and start buying. It would drive up the share price.
Defensive stocks are issued by companies in sectors that have demonstrated good performance in poor markets. Food and utility companies are defensive actions.
One of the best known market quotes is: "Buy Low – Sell High". To be consistently successful in the stock market requires strategy, discipline, knowledge and tools. We need to understand our strategy and stick to it. This will prevent us from being distracted by emotion, panic or greed.
One of the investment strategies most used by 'investment professionals' is Market Timing. This is the attempt to predict future prices from the past performance of the market. Forecasting stock prices has been a problem since people trade 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 mathematical algorithms and complex IT.
An example of market timing signals are those available http://www.stock4today.com.
There are many risks associated with 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 example, you can buy a stock with expectation of a certain dividend or a rate of increase in the stock price. If the company is having financial trouble, it may not live up to your expectations for dividend or price growth. If the business goes out of business, you will likely lose everything you invested in it. Due to the uncertainty of the outcome, you bear some risk when buying a stock.
Stocks differ in the amount of risk they present. For example, Internet stocks have proven to be much riskier than utility stocks.
One of the risks is the reaction of stocks to information about the company. Depending on how investors interpret the new item, they may either buy or sell the stock. If enough of these investors start buying or selling at the same time, the price will go up or down.
An effective strategy for dealing with risk is diversification. This means spreading your investments over several stocks in different market sectors. Remember the saying: "Don't put all your eggs in one basket".
As investors, we need to find our "risk tolerance". Risk tolerance is our emotional and financial ability to weather a market downturn without panicking and selling at a loss. When we set this point, we make sure we don't expand our investments beyond that.
The same forces that come with risk in investing in the stock market also make possible the large gains that many investors enjoy. It is true that market fluctuations bring both losses and gains, but if you have a proven strategy and stick to it for the long haul, you will be a winner!
The internet has made investing in the stock market a possibility for almost everyone. The wealth of online information, articles, and stock quotes give the average person the same capabilities that were once available only to stock brokers. The investor no longer needs to contact a broker to get this information or place buy or sell orders. We now have near instant access to our accounts and the ability to place orders online in seconds. This new freedom has ushered in new masses of hopeful investors. It's still not a random process of buying and selling stocks. We need a strategy to select an appropriate stock as well as the timing of buying and selling in order to make a profit.
Day Trading is the attempt to buy and sell stocks over a very short period of time. The day trader hopes to profit from 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 minutes or buy and sell the same stock multiple times a day.
Day traders sit in front of computer screens all day looking for short term moves in a stock. They then attempt to get in on the bandwagon before it reverses. The real day trader does not hold a stock overnight due to the risk that some event or news will trigger a reversal of the direction of the action. It takes intense concentration to monitor the minute-by-minute movement of many stocks.
Day trading carries a lot of risk due to the uncertainty of short term market behavior. The slightest economic or political news can cause a stock to fluctuate wildly and lead to unexpected losses.
There are a few people who are making respectable gains in day trading. The people who probably get the most out of it are the self-proclaimed "experts" who sell the books or operate the websites that cater to the day trader. Because of the profits to be made on sales to people who want to get rich quick, they make it as attractive as it gets. The truth is, in the long run, more people lose than win in day trading. This does not translate into a very good investment.