Understanding the Stock Market

What are the best ways to go about understanding the stock market?

• Learn about its history. This is vital. Without historical knowledge you will not know how to react to current events. As a result, you'll be forced to fall back on acting on your emotions. You might as well go to Vegas. At least you'll get free drinks.
• Learn about common investing pitfalls
• Read investing books -- and lots of them. Reading is one of the best ways to acquire knowledge in any discipline. However, with investing you have to be careful because there's so many conflicting opinions out there.
• Understand speculation. Many people think they are investing when, in fact, they are speculating. Speculation is basically gambling. I go over speculation in detail in investment basics.
• Read the common stock definition.
• Use your common sense detector.
• Once you've learned a lot about the stock market and how it works, do your best to understand the stock market.

What are some key ideas that help in understanding the stock market?

• Understand how stocks work.
• Ignore the day to day gyrations of the stock market.
• Be greedy when others are fearful and fearful when others are greedy. In early 2009, everyone wass fearful of the stock market. That would have been a good time to be greedy.
• Your tolerance for risk and timeline for when you will need the money determine what types of investments you should use. If you need the money within five years, don't put it in the stock market. If your investments dropping by even 1% makes you sick to your stomach, then don't put your money in the stock market.
• Ignore hot stock tips. If it was so hot, why would someone give it to you?
• Be patient. Patience in the stock market is rewarded. If you hold your money in a broad US stock index fund for long enough, you are all but guaranteed positive and returns.
• Investing should be boring. If not, then you are speculating.
• Don't listen to stockbrokers' tips. Their interests conflict with your interests.
• Get realistic expectations. Don't expect to find a way to guarantee that you double your money every year -- or anywhere near that. Even Warren Buffett didn't guarantee positive returns year after year. Over the long-term, you should expect to earn about 10% in the stock market from increase in price and from dividends received. Over the short-term, the stock market can give you anywhere from big gains to big losses.
• Look at the stock market over a long period to get a good perspective on past, current, and future events. This will teach you to ignore emotional impulses due to short term fluctuations.

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