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Stock Market Basics for Beginners

| Swing Alpha on 7 Mar 2017 12:00 AM

Introduction

No one ever likes to lose money. Besides, the pain threshold of some of us is greater than that of others.  In case you are aspiring on investing or venturing in the stock market and the idea of a loss disappoints you, perhaps you should not invest. Nonetheless, investing in the stock market, there are a couple of things you need to know to increase your probabilities of accumulating income. That is the main subject of this piece. Though there are a lot of caveats and details, this item will help you comprehend the essentials every investor should know.

So what is Stock Market?

To some people, the stock market is a vague marketplace where people gamble. The truth is, the stock market is a multifaceted system where buying and selling of shares of publicly-traded corporations are dispensed. This is not betting at all. You don’t understand why? Let us say you place $1000 on a single roll of a dice. In case you earn, you will win $Y. In case you fail, you will not lose the whole amount, $1000. Once you venture in the stock market, you will win $Y or lose $X. It is seldom to lose the whole amount unless you invest in a corporation that goes kaput. You ought to say that a stock market is a assemblage of individuals pitting their proficiency against each other.

The Stock Market is a System of Trading that is Adversarial

A stock market is a collection of millions of venture capitalists with absolutely contrasting outlooks. This is because when a person or rather one investor trades a particular security, another investor must be enthusiastic to purchase it. Since both of them cannot be accurate at the same time, it is an oppositional system. In simple terms, one investor will suffer a loss while the other one accumulates profits. Therefore, it is very crucial to becoming well versed on the investment you are aspiring to venture into.

What Makes Stock Prices Go Up and Down?

There are a lot of factors that determine whether the prices of the stock fall or rise. These include the opinions of well-experienced investors, the media, politics & social unrest, demand & supply, natural disasters, lack of great quantity of suitable options. All these factors plus all pertinent information that has been circulated creates a certain kind of sentiment (i.e. bearish and bullish) and a corresponding number of sellers and buyers. In situations when the number of sellers is higher than that of buyers, the prices of the stock tend to go down. Conversely, when there are more buyers than the sellers, the stock prices will rise.

Why is the Stock Market so Hard to Predict

Assuming the stock values have been rising for several years, wise investors come to a realization that a alteration will come and the stock values will eventually fall. What we do not know is what will lead to the falling of these prices or exactly when this will happen. Therefore, some will sit on the sidelines with cash waiting for the appropriate period to get in. Investors who are enthusiastic to make the assumption that the risk may hop in, since the profit on the cash is so low and it hurts to earn $0 while observing the stocks move higher. To do this, there are a couple of key questions one need to ask himself or herself. If you are on the sidelines, how will you know the right time to get in? In case you are already in, how will you know the best time to get out? These questions could be easily answered if the stock market was foreseeable. However, it is not. There are 3 basic subjects an investor should contemplate. The very first one understands the point at which the prices of the stock are objectively valued. The second one is the incident that will cause the falling of the prices. The last one understands the process through which humans make a decision. Let us look at these briefly.

Stock Valuation

The prime determinant of the actual stock price is the market activity. When making the decision to sell or buy, the individual investor will frequently compare a stock’s price to its fair value. For example, if a stock is trading at $40 per share and it has a fair value of $45, it may be worth buying. On the other hand, if the stock trades at $40 but its fair value if $35, the investor should try to avoid because the stock is considered overvalued and the best thing the investor should do is avoid. How do we calculate the fair stock price? Ideally, it would be based on a formula. However, there are other different ways to do this. First, the fair value of the stock can be determined by combining the value of a corporation’s assets on its balance sheet minus liabilities and the depreciation. The second method is to obtain its fundamental value, which is the net current value of a corporation’s future earnings. There are many other methods but the above two are the main. Since the method may yield slightly different results, this makes it a little bit difficult to know whether a stock is undervalued or overvalued. Important to note is the fact that a stock can remain overvalued for some time. This is another reason why it is problematic to make a decision on whether to buy or sell.

Human Decision Making Process

This is the most interest issue to consider in the stock market. All human have the logical and the emotional component. We may analyze a situation logically but act emotionally. When it comes to making the decision on investment, t is significant to process the relevant data and make the right decision. Although it is impossible to know everything one would need to know, making the decision without any biases is important.

Triggering Event

Understanding which event will cause the stock price to rise or fall is very important. Need I say more?

When is the Best Time to Buy and Sell?

Some of the two most significant decisions an investor will make are when to sell and when to buy. The best time to sell is when others are actively optimist and the best time to buy is when others are doubtful.  When buying, it is important to note that the prospect of a higher is greater when you buy after the price had fallen.

A stock market is a complex place where an apprentice investor is not predominantly well suited. Refrain from the “hot tip” in the lunchroom or around the water cooler. The prices of the stock fall and rise because of reasons. To avoid the 2008 type of disaster, another Enron, or WorldCom, be sure the corporation you are purchasing is worth owning.

3 Mar 2017 4:38 PM | Anonymous

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