Stock Market for Beginners
The Stock Market can seem intimidating for beginners. Most of the basic concepts are actually not complicated. Its important to understand these basics so you can make educated decisions about your investments in the stock market. Here 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 how the stock market works and what to expect from it are two huge pieces of armor that you can take with you into the battlefield. 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 is where 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 its 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. Likewise 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. 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 this 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. 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. Its 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. 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. 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, lets 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. Its not important to know whether or not we're in a bear 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, its 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!" Also, having a quality investing plan can help keep you calm. I know of a great investing plan that will leave you feeling secure during the frequent ups and downs of the stock market. Once I started using it, I slept much better at night. Here are some of the most basic Stock Market concepts in laymens terms:
return from stock market for beginners to home Like my site? Subscribe to my blog at the bottom of the bar on the left to get instant notification when I add a new page. I recommend getting blog feeds with Google reader. I use it almost every day and its easy and convenient to use from any computer. Or you can subscribe to my e-zine immediately below for exclusive thoughts and information about investing that I won't necessarily put on my site.
|
