Lesson: Stock Market: What You Need to Know
Investing in the stock market is like anything else: the more you know and understand, the more likely you are to succeed. This article outlines 5 things you need to know before you invest your money.
1. Be prepared to learn as much as you can about the stock market; read about the history of the stock exchange, past and current trends, how stocks are rated and how the stocks you are interested in have performed historically. The only way to make informed decisions is to be informed; the more you know about a particular stock and about the stock market, the more likely you are to make a rational decision about when to buy and sell. It is not unreasonable to assume a minimum of five hours a week should be invested in stock market news as well as following individual stock prices daily.
2. Buy low and sell high. The only way to make a profit is to follow that formula, and the only way to know when to buy and sell is to gather all the information you can on a regular basis. Of course, even a careful analysis of individual stock performance and overall market trends is no guarantee of successful trading, but making uninformed decisions is tantamount to spinning a roulette wheel. While it is true that buying and selling stocks is a form of gambling—the trader is betting a stock will perform in a certain way—the odds of making money instead of losing money on stocks are exponentially better when the trader compiles and analyzes all of the data available before making any transaction.
3. Never invest more than you can afford to lose. Heeding this caveat will lessen anxiety and stress as well as act as a buffer against making irrational, hasty decisions. Many an investor has panicked when their stock started to plummet and they sold too soon—they not only lost their money, but in many cases, watched that same stock take off again. If you are willing to lose a certain amount, you will be comfortable riding it out and not selling too soon.
4. Always watch what the market is doing as a whole. Even solid, blue chip stocks are vulnerable to a market that is declining. Generally speaking, if the market makes a sharp move up, it will make a sharp move down; stay on top of the trend so that you are able to sell high before the market plunges. Conversely, a slow increase in the overall market usually means the decline will be slow as well. The less extreme the movement, the more time there is to make buying and selling decisions that are beneficial to you.
5. Keep abreast of current events. Political decisions and impending legislation affect market trends, but there are many other factors that affect trends—trends that may not manifest for many months. For example, if there is a prolonged and severe freeze in Florida, the orange crop will be smaller; the cost of oranges and orange juice will skyrocket to compensate for a low yield. In a poor economy, the consumer demand for orange juice will decrease; the juice will not sell much because it costs too much. Therefore, the stock prices for orange juice manufacturers will start to plummet. However, there is a period of months between the time the crop is heavily damaged by frost and the time the stock starts to decrease because the company is selling less of its product. By keeping abreast of what is going on now and how those events can play out months later means that you can make a trading decision well ahead of time that will benefit you.
Knowing how and why world events affect stock prices, keeping a daily watch on market trends and making trading decisions based on information and not emotions, is one of the best ways to ensure you make money on your stock portfolio.
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