It is often said that the stock market system is set so that the house always wins. Despite the pitfalls
and difficulties of successful stock market investing, there are hundreds of people, individual investors who are buying and selling corporate securities on one of the regulated stock exchanges with success. Still, their income doesn’t derive from wild luck or taking chances, but from adhering to several simple rules, which are defined over years of stock trading. Peter Lynch, a portfolio investor of Magellan fund in the 80s even said that whoever made through fifth-grade math can trade in stock with success.
What you Want to Achieve
First of all, you need to know why you are considering investing in the stock market. When you know your purpose and the estimated time in the future you’ll be needing the funds, you can calculate how much you should invest and what the return of your investment should be in order to yield the desired result. The fluctuations of the stock market make no guarantees that your funds will be available when you want to, that is in short terms. However, if you are saving for retirement or college, there are free online financial calculators like Kiplinger, Bankrate, CNN Money and TimeValue.
Know your Risk Tolerance
The degree of anxiety and how you feel in general in the face of risk is called risk tolerance. It is individual, but can be increased by education, income, and wealth, or decreased by age. If you learn more about investing, how stocks are traded, what price change is usually involved, or how to liquidate an investment, you will perceive stock trade less anxious even though your risk tolerance is unchanged. You will learn to refrain from investments that won’t let you sleep at night. Anxiety grows into fear which breeds emotional responses, rather than logical when decisions are to be made.
Emotions Influence Stock Price
Prices of companies are influenced by the common emotions of the whole investment community. If most investors are concerned about a company, its stock price will probably decline, and vice versa. Market hours are characterized by constant battle between “bears” (investors who feel negative about the market) and “bulls” (those who feel positive). Basically it’s what determines the securities’ price. Before you buy a security, you should have a good reason for it and more importantly find the point when your reason becomes invalid and you need to liquidate your holdings.
Know Basic Terms
Before you make your first investment, you should be on terms with several concepts. Metrics such as P/E ratio, earnings per share (EPS), return on equity (ROE) and compound annual growth rate (CAGR). It is important to know how to calculate these metrics and how to evaluate different companies using these metrics. You should learn how to distinguish fundamental and technical analyses, and when is the each one best suited. Also there are different types of investment accounts. Margin accounts are sometimes necessary for certain types of trades although cash accounts are predominant.
Diversification Saves the Day
While some legendary investors who made millions in their times like Carnegie, and Buffet swear by putting all your eggs in one basket, and watching it closely, there is a little chance that you are either of them. Beginners in the stock market will often benefit from diversifying their stock. Online platforms like Equity Feed make it easier to do it. By diversifying your portfolio you will recover more easily from the loss in one company, than if you invested everything in a single stock.