Are you new in the field of stock market investing? You do not know where to begin and what are the best stock market tips to use? Worry no more as we will discuss to you some helpful tips that you can use as you enter the market.
What is Stock Market?
Stock market is referring to the collection of markets and exchanges where the issuing and trading of equities or stocks of publicly held companies, bonds, and other classes of securities take place.
This kind of trading is either through formal exchanges or through over-the-counter marketplaces.
Stock market is also known as the equity market. It is considered as one of the most vital components of a free-market economy. Stock market offers companies with access to capital in exchange for giving investors a slice of ownership.
Stock Market Tips
Everyone in the field of investing is looking for a quick and easy way to reach the top. It seems to be human nature to always look for hidden keys that will lead you on the top.
Here are some of the best tips that you can use when starting an investment with stock market.
Tip #1: You Have to Set Some Long-Term Goals
Before you enter the market ask yourself first. Why are you investing in stock market? Will you need your money back in just few months, a year or longer?
First, you should know your purpose and the likely time in the future you may have need of the funds. If you are likely to need your investment returned within a few years, consider trying another investment. Take note that stock markets with its volatility it provides no certainty that all of your capital will be available when you need it.
Just by knowing how much capital you will need and the future point in time when you will need it, you can compute how much you should invest and what kind of return on your investment will be needed to produce the desired outcome.
You can use one of the free financial calculators available over the Internet, for you to estimate how much capital you are likely to need.
The retirement calculators, which range from simple to more complexes, are available at Kiplinger, Bankrate, and MSN Money. Meanwhile, college cost calculators are also available at CNNMoney and TimeValue.
However, a lot of stock brokerage firms provide similar calculators.
Just remember that the growth of your will depend on the three interdependent factors.
- The number of years or the period of your investment.
- The capital you invested.
- The amount of net annual earnings on your capital.
Take note that you should start saving up as soon as possible and save as much as you can. With that you can receive the highest return possible consistent with your risk philosophy.
Tip #2: You Should Avoid Leverage
Leverage means the use of borrowed money to execute your stock market strategy. In a margin account, banks and brokerage firms can loan you money to purchase stocks, usually 50 percent of the purchase value. For example, if you want to purchase 100 shares of a stock trading at $100 for a total cost of $10,000, your broker can loan you $5,000 to complete the purchase.
The usage of borrowed money can “levers” or exaggerates the result of the price movement. Let just say that if the stock moves to $200 a share and you sell it. If you used your own money, your return would be 100 percent on your investment. However, if you borrowed $5,000 to purchase the stock and sold at $200 per share, your return would be 300 percent after repaying the loan worth $5,000 excluding the cost of interest paid to the broker.
It may sounds great when the stock goes up, however you must consider the other side. Let’s just say that instead of doubling to $200 the stock fell $50 per share, your loss would be 100 percent of your initial investment, plus the cost of interest to the broker.
Leverage is a tool that is neither good nor bad. But you must remember that this tool is best used after you gain experience and confidence in your decision-making abilities. As a beginner, you must limit your risk to ensure that you can profit over the long term.
Tip #3: You Have to Understand Your Risk Tolerance
Risk tolerance is a psychological trait that is genetically based, but it is positively influenced by education, income, and wealth. It also negatively by age because as we get older the risk tolerance decreases.
Your risk tolerance is how you feel about risk and the degree of anxiety you are feeling when risk is present.
Meanwhile, in psychological terms, risk tolerance is known as “the extent to which a person chooses to risk experiencing a less favorable outcome in the pursuit of a more favorable outcome.”
In much simpler words, would you risk $100 to win over $1,000 or risk $1,000 to win $1,000? Everyone vary in his or her own risk tolerance, and there is no right balance.
Risk tolerance is also affected by one’s perception of the risk. One good example is flying in an airplane would have been perceived as risky in the early 90s. However, in our time today it is much the risk of riding an airplane is lesser since it is now a common occurrence.
In the field of investing, the idea of perception is important. As you gain more knowledge about investing, such as how stocks are bought and sold, how much volatility is usually present, you are likely to consider stock investments to have a much lesser risk than you thought before making your first purchase.
By understanding your own risk tolerance, you can avoid those investments which are likely to make you anxious. Do not own an asset that keeps you from sleeping at night. Anxiety stimulates fear which triggers emotional responses to the stressor.
Meanwhile, during periods of financial uncertainty, the investor who can hold a cool head and follows an analytical decision process invariably comes out ahead.
Tip #4: You Have to Control Your Emotions
One of the biggest problems to stock market profits is the inability to control your emotions and make logical decisions.
However, in the short-term, the prices of companies reflect the combined emotions of the entire investment community. When the majority of investors are concerned about a company, the price of its stock is likely to decrease. But when the majority are positive about the future of the company, its stock price tends to increase.
An investor who is negative about the market is called “bear,” while an investor who feels positive is called “bull.” During the market hours, the continuous battle between bull and bear is reflected in the constantly changing price of securities.
These short-term movements are compelled by speculations and emotions rather than logic and a systematic analysis of the company’s assets.
When you purchase a stock, you should have a good reason for doing it and an expectation of what the price will do if the reason is valid. At the same time, you should establish the point which you will liquidate your holdings. Especially when your reason is invalid or if the stock does not react as expected when your expectation has been met.
In other words, you should have an exit strategy before you purchase the security and execute your strategy unemotionally.
Tip #5: You Should Handle Basics First
Before you enter your first investment, you should take time to learn the basics about the stock market and the individual securities surrounding the market.
Take note that it is not a stock market, but a market of stocks. Unless you are buying an exchange traded fund, your focus will be on individual securities, rather than the market itself.
However, there are some times when every stock goes in the same direction. Even when the averages fall by 100 points or more, the securities of some companies will increase in price.
Here are some of the areas which you should be familiar with before making your first purchase:
1. Different Types of Investment Accounts
Cash accounts are the most common, margin accounts, in other hand, are required by regulations for certain kinds of trades. You should know how margin is calculated and the difference between initial and maintenance margin requirements.
2. Financial Metrics and Definitions
You should understand the definitions of metrics including the P/E ratio, earnings per share, return on equity, and compound annual growth rate. BY knowing how they are calculated and having the ability to compare different companies using these metrics are critical.
3. Stock Market Order Types
You should know the difference between market orders, limit order, stop market orders, and other types that are commonly used by investors.
4. Popular Methods of Stock Selection and Timing
It is also important for you to understand how fundamental and technical analyses are performed, how they differ, and where each is the best suited in a stock market strategy.
Before you enter the field of investing, whether it is stock market or other types of investments, you should have some knowledge about it.
Looking for stock market tips on how to succeed in investing is not bad. As long as you know that it will not help you reach the top immediately.
Succeeding takes time, these stock market tips are only here to help you along the process. If you want to reach the top, you have to work hard on it.
If you want to learn new things and learn strategies about the market, BWorldpedia is the site you should visit! We provide profound and useful insights about the market and across a plethora of topics related to it. Also, register an account now with BWorld and start your investment journey.