Stock Market Basics
While it holds true that anyone who knows the stock market basics can start investing, it is equally important to time your investments, have a solid understanding of the available stocks and be constantly informed of stock market changes. So a novice investor should avoid just purchasing stocks in the market and take their time in understanding some of the basics of the stock market.
No doubt the most important element of stock market basics is to know what a stock is. A stock is a unit of ownership in a company. When a company wishes to raise capital either to expand or for any other purpose it issues shares to the general public. Only a company listed on the stock exchange can issue shares. The investors who purchase these shares get a unit of ownership in the company and enjoy any gains or losses when the share prices rises or falls. The share prices rise when there is a lot of demand for the share. The demand for a share increases when there are positive projected forecasts for the company or there is some reorganization within the company’s structure which might lead to increased profits. For example, if there is news that a new Chief Executive Officer is coming into place that has a good reputation and people are certain that this officer will lead the company to positive growth, such news increases the demand of the share and consequently the share price. The price of a share falls when people are not willing to pay the current price either due to poor projected growth or news that negatively impacts a company’s profits.
Another one of the basics of investing in the stock market includes knowing when to buy the shares. Even though no one can really predict the best time to invest in the stock market, there are certainly some things that one can do to increase their chances of timing the market. For instance, one needs to be constantly updated and informed on the market news and be able to take advantage of any opportunities that may arise due to current event situations. Just an example, knowing the current market news – an investor starting out would probably not invest in BP (British Petroleum) given the oil spill in the Gulf. Similarly, there are massive floods in Pakistan which have shaken the entire infrastructure of the country making it extremely volatile to invest in. A new investor would probably not want to invest in the Pakistani stock market. The investor would know this just by following the market news.
However, one must be aware that not everything is clear in black and white. For instance, a stock trading at a real high price does not always mean that it is a great buy, since the demand has driven up the price. Sometimes stock prices trade at more than their intrinsic values so a new investor has to beware of such stocks as well.
Basics of stock market investing include knowing what exactly you are trying to achieve from your investment. For instance, are you in the stock market for quick short term gains or are you in the stock market for long term and are willing to wait and enjoy long term gains. Besides determining the length of your investment, you should be clear on the purpose of your investment. For example, if you are retired then you should probably refrain from investing in risky stocks as you don’t want to put all your savings at risk. Similarly, if you wish to save for your child’s university fund and will not need the returns for another 18 years, then you know you can play in the stock market for the long term. Hence, before one starts investing heavily, they should have a very clear idea of what they want to get out of their investment. Knowing and learning more about stock market investing basics is key in setting you on the right path.