Investing in the stock market is simple yet not easy. It is simple in a sense that it is learned and practiced, yet at the same time it is not easy because there are a lot of things that are beyond the investor’s control. Nevertheless, it remains one of the best money making tools there is.
The most common dilemma that a lot of people run into especially are the new ones is “where or how would I start?”. Investing in the stock market may require a lot of things to be learned (except if one invests in managed funds such as ETFs, mutual funds or trust funds); this might be too much of a load for investors.
The great news is that things can be summarized and the speed of learning can be increased by considering only the most essential things. Here are some of the most important things to be considered in stock market investing.
1. The trend is your friend: The trend is the general direction of stock prices. Hence if stock prices are rising, then it should be a great time to buy and hold on to shares since they are appreciating. However, if it is going down, it should be best to avoid the stock market because stock prices are weak or are dropping. Stock prices that are dropping though are ideal to monitor. This is because once the momentum of decline slows, they are more likely to bounce back up resulting in huge gains within a short period of time.
2. Update yourself with current events: With the Internet, the entire world is just a single market. What happens on the other side of the globe affects the other one at the other side. For example, the fear of the possibility of the US Federal Reserve cutting back its bond purchases is being felt all over the world, hence several markets indexes are dropping alsong with stock prices. As an investor, it should be very wise to get yourself updated with what is going on in the world since more often than not, it will significantly affect sentiment or the mood of the market.
3. Know the stock that you’re investing in: One difference between day or short-term traders to investors or buy-and-hold traders is the time frame that they’re willing to hold on to stocks. Day traders hold stock for a very short period of time while investors hold on to it for long periods of time. For day traders, sometimes the background of the stock or the company is not that relevant since they aren’t going to hold it long anyway. However, for investors, it is very important to familiarize with the company that is being bought since it is a part of the barometer of whether a certain stock has good potential or not. Randomly investing in stock without knowledge of it is unwise, increases investment risk and potentially wastes capital and time.
4. Valuations: If charts are for technical analysts or short-term traders, investors consider valuations the most. Valuations normally suggest whether a stock is cheap, if it has great potential or is too expensive. Valuations can be derived from financial statements, but will require some basic mathematics and good knowledge and understanding about financial statements. Generally, all investors are familiar with what valuations are.
These are just a few of the many things that investors should learn and focus on when investing. However, with these things alone, investors are more or less equipped to make good investment decisions.