Investment Basics for the Stock Market

Stock market investing has several unique attributes and factors in comparison with the bond market. In the bond market, the bond holder simply lends money at a fixed rate/term and is interested in securing the capital, in addition to a fee, usually a percentage, collected for allowing the organization to employ the capital. Most bond holders are only concerned with receiving as much of the amount agreed upon in the bond as possible, even in the advent of bankruptcy. Being concerned with the growth of equity, stock market investors have an entirely different role and consideration.

The first thing that a stock market investor should know is the potential downside of investment. In the worst cases, the equity is eliminated in bankruptcy proceedings with any existing capital going to debt (a.k.a. bond) holders. This results in a net zero gain and a loss of all of the invested capital. Unlike bond holders, it is therefore in almost all cases, against the interest of equity (or stock) market investors for the organization to enter receivership proceedings. Instead of loaning each dollar at a fee of say 8 percent, it is rather grown by means of employment. The two primary methods of return for equity investors are dividends, or equity paid out in cash to each person holding a stock certificate, and the sale of the certificate after the equity of the organization has increased.

Although many have profited from speculative investing, or the practice of investing with the belief that one has better information than others in the market, it is how most investors lose money. A much more steady method is investing in ventures that you have an influence over. It is important to be able to put effort in assisting an organization that you’ve invested in. This is especially the case if financial matters begin to stray with capital invested at the heart of the organization. Many people have done research, but it will be disheartening to watch others take over the organization in the event that too much capital is up for grabs. Not even the entire housing market, at one point becoming larger than the entire business world, by means of loans registered with the Federal Reserve, could withstand the trillion dollar bets against the housing market placed by the financial titans such as Goldman Sachs. It is important to remain smart about where investment capital is going and how it will be protected as an equity and stock market entrant.

Assuming that the capital is better employed through publicly accessible stocks in a regulated market instead of a personal loan to someone within a community, it is important to perform an analysis for the organization to ensure everything is in check. This involves reading the financial reports, and determining the nature of the assets/income versus the liabilities/capital outflow. If it is not readily ascertainable from the financial reports, in a verifiable manner, then further research may be needed. It is common for the assets to the obscured through several layers of financial instruments. Enough emphasize cannot be placed upon ensuring to commit effort to perform a full discovery of the assets. If any portion of the asset base exist in obscured securities where it is not possible to determine the nature, it may be best for the investor to avoid the investment, or contact the organization to perform further investigation.

Having found a a decent asset base, it is important to become familiar with the management team. Looking at past performance will grant the investor some type idea of how the management team will react in certain scenarios. This is important, and the reactions should be appropriate for the market and factors they face. It will ensure that the organization will be able to weather any storm that is found in the open waters of the industry and market they exist within.

Once satisfied with the asset base and management team, the investment is as good as any; that is to say, if the tides of the investor market are not unmanageable. Capital finds its way into paying opportunities and the size of the investor is sometimes proportionate to the class of investment. There are some opportunities where smaller investors ride the coattails of the more aggressive and influential investors, but there is usually a very strong asset base when this occurs. It is important to understand the dynamics of the investor market, as that is where the money is. Trillions of dollars are moved and/or influenced by the larger players. Management of that kind of capital does not come easily, and if you are betting against these players, there should be some type of immediate justification for doing so.

Once these factors are fulfilled, it would generally be that an investment would be made, with the investor partaking in the growth of the capital. Not strictly stock, a derivatives market exists where contracts can be purchased to buy or sell, short or long. Buying a certificate short means that you guarantee selling a certificate at a certain price, and may not necessarily have the certificate to give at that point. To clear a short transaction, the underlying equity will be purchased and sold at the short price. This means you could sell short at $35, have it execute at $38 and lose $3 in the transaction. When too many shorts come up in a market, it is an alert that it is going to be one or the other, either equity holders or short contract holders, that will prevail, in the best scenarios.

All of these factors considered, it is a generally a good role to be in, being able to invest in and help to grow organizations. It is important to target the capital to avoid those too influential to be bet against, but also to bet in capable organizations with valuable asset bases. Given these considerations properly fulfilled, the capital will be directly employed by capable and well established organizations, by means of this vehicle of capital employment. Not much more could be asked for by the astute and savvy investor.