The Stock Market can seem intimidating for beginners. Most of the basic concepts are actually not complicated. It's important to understand these basics so you can make educated decisions about your investments in the stock market. This page is a brief stock market for beginners guide.
The stock market can seem like a dangerous place to venture into, but investing in the stock market doesn't need to be scary. Understanding the stock market -- how it works and what to expect from it -- is a huge piece of armor that you can take with you into the battlefield and the first step in investing in stocks for beginners. The problem with most people is that they go into battle naked or they let someone give them a "hot tip" that was promised to be a tank, but turns out to be a twig. Don't let that happen to you.
People continually get caught up in the short-term movements of the stock market. This stock market for beginners guide is crucial, because understanding what to expect can really help you out. Someone once asked J.P. Morgan what the stock market will do. He replied, "It will fluctuate." The stock market and, likewise, individual stocks within it, will go up and down regularly. Sometimes they will have long stretches of going up or down followed immediately by the opposite. Do not get swept up in the pessimism during a bear market or the optimism during a bull market. I can't emphasize the previous point enough. Here is a good, recent example of undue pessimism.
What our emotions tend to tell us is that when something has done very poorly lately is to sell and when something has done very well lately to buy. People who follow their gut instinct on this end up buying high and selling low over and over again. They likely even think they're making a wise decision each time! Two common phrases that make it obvious to me that the person who speaks it knows nothing of investing fundamentals are, "the stock market just looks too risky right now because it has fallen so much lately." And, "the stock market looks great right now! Have you seen the soaring stocks lately!!!"
Those emotions give us so many problems because they serve us well in other areas of our life. For example, if a sports team has done well lately, you expect them to continue doing well in the near future. The same is true for a team that has performed poorly lately. Another example would be a friend that keeps letting you down. He or she will likely continue to let you down. While the friend that has been there for you every single time in the past will likely continue to be there for you in the future. In both of these examples, the thought process that would help you view the life situation correctly will lead you astray when thinking about the stock market.
Logically, when stocks go down a lot, they become cheaper and less risky. Likewise, when stocks go up a lot they become more expensive and more risky. Our human instincts, and many financial talking heads, tell us the opposite. Don't get fooled by the latest stock market trends. I've seen investment writers sigh in relief after a big rally and say that stocks are "safer." Unfortunately, that is the exact opposite of the truth.
When prices at the grocery store go up, you don't get excited and buy more. Why would buying stocks be any different? Stocks represent a piece of ownership of a company and, therefore, when stock prices go up, it is more expensive to buy the same thing. Yes, sometimes fundamentally important information comes out that changes how you value a stock, but that is rare.
If a place selling lottery tickets suddenly dropped their prices by 50%, but kept the same potential winnings, then the lottery tickets would be less risky. Likewise, if they doubled the ticket prices, then your speculation would be more risky. The same is true for stocks.
When the Dow Jones dipped into the 6000's early in 2009 year, I was salivating at the prices. I thought, "Wahoo! Everything is on sale!" Think about buying stocks the same way you would about buying clothes or gadgets. If prices go down, you should be more inclined to buy. Not to sell your own at a discount. That is a classic mistake many stock market beginners make.
If you look at the stock market history and Dow Jones history, you'll see that an investor's emotions are his or her worst enemy. Not only that, but you'll see that many times throughout the stock market's history people have thought the financial world was coming to an end. They were wrong every single time. The stock market even pulled itself out of the depression and kept on chugging along. Our emotions are one of the reasons why Warren Buffett, his mentor Benjamin Graham, and many other wise investing minds have counseled laymen to not pay attention to the regular gyrations of their portfolio. It's impossible to reliably predict what the market will do in the immediate future.
The waxing and waning optimism of the public about the stock market is why so many people buy high and sell low. Even beginner investors know not to buy high and sell low. For example, we've been in a bear market for a while now (This was written in 2009). Although, we may now have just entered a bull market. Who knows which one we're in right now? Nobody. We won't know until its history. Anybody that tells you they know when the market will turn is either lying to you or taking a big guess.
You may ask, "but, David, haven't there been people that have predicted big market turns before?" Of course there have been. They have been at least a little bit lucky. You don't hear about the many times more people who predicted wrong or how that person mispredicted many times before and after the accurate prediction. When tens of thousands of people are making stock market predictions, you have to expect some of them to be right just on pure luck.
For example, let’s say I roll a 100 sided die (I know, it doesn't exist, but stay with me). 10,000 people claim to know the exact number that it will land on. Most likely, some of them will guess right. Does this mean that those people who guessed right are tapped into some divine force that predicts the rolls of dice? Rubbish. They got lucky. Don't be fooled. This is stock market 101.
It’s not important to know whether or not we're in a bear market or a bull market or what will happen in the near future. It is, however, important to know that both types of markets will continually come and go. Therefore, you can make intelligent investing decisions that hold up in either market condition.
When you look at the stock market history, it's a lot easier to be calm during these rough times. Some crazy stuff has happened! And people have claimed that investing in stocks was no longer a good idea many times before. Understanding the history will make it easier to keep your head when people are screaming, "Buy! Buy! Buy! At any price buy!" Or, "Sell! Sell! Sell! No matter how low it goes!"
Here are some of the most basic concepts about stocks for beginners, in laymen’s terms.
Never mix up short term trading with actual investing. Most of the "investment" talking heads will not mention the folly of day trading. Yet, for some strange reason, day trading or anything near the short-term mindset that goes into it is not the right way to invest in stocks for 99% of people!
Online investing is the best way to invest in the stock market. It is convenient, low cost, and really easy. (Almost too easy!)
Many people use an investment club to reduce risk and minimize their weaknesses in investing. You should really consider joining or forming one. It is a realistic option for many.
Want to know how well your investment performed? Or perhaps how well you have to perform to meet your goals? The calculation is not as simple as some think. Check out my really easy investment calculator. You may also want to look at ROI -- Return on Investment. If you need to calculate ROI, here is a really easy and simple to use ROI Calculator.
There are different classes of stocks. What classifies the stock is typically the current state of the company. The most common classes are value stocks and growth stocks. They are basically opposites of one another. For the most part, I wouldn't recommend a beginner care about whether a stock or stock index is growth or value, but it's such a common term, that it helps to know what people are talking about when they mention either of the classes. If you want to try your hand at them, I recommend starting with Value investing.
Most people, including myself, think it's important to invest in foreign stocks. Foreign stocks increase your diversification, are more risky, but have a greater potential for large gains.
I hope you have found my stocks for beginners guide helpful. Please explore my site further and take advantage of the many resources provided here about the stock market.