Explain stocks in detail to new investors
If you are about to enter the world of investing in stocks, and aspire to make the most of your money and options, you are required to obtain an explanation of stocks in detail, by educating yourself on how to make investments in stocks with confidence and intelligence, and getting acquainted with the resources available online to help you evaluate Stocks, to find ways to protect the money you earn as much as possible.
Phrases like “earnings drivers” and “daily highs” don’t mean much to the average investor who is only interested in getting some retirement-oriented mutual funds. In addition to some absorbing some basic information about how stock trading works.
This article will provide you with everything you need to know about investing in stocks by providing you with a detailed explanation of stocks as well as a comprehensive overview of the markets you trade in.
The most important points about investing in stocks
If you are interested in investing in stocks, keep the following points in mind before making any move.
You don’t buy a stock, you buy a company.
The main reason you invest in stocks is that the company is making a profit and a success that you want to participate in in the long run.
If you buy a stock when the company is not making a profit, you are not investing but speculating.
Stocks should not make up 100 percent of your assets.
The share price depends on the company, which in turn depends on its environment which includes its customer base, industry, general economy, and political climate.
Your common sense is just as important as the advice of any investment expert when it comes to choosing the right stocks.
If you have no idea about the company’s prospects, use stop-loss orders.
Even if your philosophy is to buy and hold stocks for the long term, continue to monitor your stocks and consider selling them if they are not appreciated or if general economic conditions change.
Check the company’s fundamentals before investing
Do not underestimate the importance of doing some research before you buy shares from any company, as it will help you get an explanation of the company’s shares in detail. Here are some basics that you should keep in mind when you look at a company’s main financial statements (income statement and balance sheet):
Earnings: This number must be at least 10 percent higher than the previous year.
Sales: This number should be higher than the previous year.
Debt: This number must be less than or close to the previous year. It must also be less than the company’s assets.
Equity: This number must be higher than the previous year.
Consider financial measures before investing
Before you invest your hard-earned money in stocks of a company, you need to check whether the company is in a sound financial condition. Here are some key measures to consider:
Price-earnings ratio: For large-cap stocks, the ratio should be less than 20. For other stocks including growth stocks, small-cap stocks, and speculative stocks, it should not exceed 40.
Price-to-Sales Ratio: The price-to-sales ratio should be as close to 1 as possible.
Return on Equity: The return on equity must increase by at least 10 percent annually.
Earnings growth: Earnings must be at least 10 percent higher than the previous year. This rate should be maintained over several years.
Debt-to-Asset Ratio: The debt must be half of the assets or less.
Verify the company
Before you buy shares in a company, you need to check their background and soundness. Here are some points you should take into consideration:
- Company annual report
- Inventory reports
- Value line investment survey
- Reputable stock investment sites
- Internet resources
With all the tools available on the internet, you have no excuse for not educating yourself about the company you are about to invest in. Here is a list of the best financial sites on the Internet:
- Bloomberg
- Financial Sense
- Forbes
- King World News
- MarketWatch
- The Ludwig von Mises Institute
- Nasdaq
- The U.S.A. Securities and Exchange Commission
- Yahoo! Finance
Reassuring points for lost stock investors
Wise investing is not only about what you invest in, but even how you invest. If you want to create long-term wealth by investing in stocks, keep the following in mind:
Invest in stocks of profitable companies that sell goods and services with high demand to zigzag your stock upwards.
Keep your assets diversified by investing in stocks, ETFs, mutual funds, fixed assets, etc. to be more secure.
Keep yourself updated on your portfolio, the financial markets, and the overall economy to protect yourself from the fear and anxiety that comes from the unknown and the inevitable surprises.
Educate yourself on various investment tools such as stop-loss orders and put options and use them regularly to give yourself more control over the downside and more peace of mind.
Maintain strict control of your debts and finances to relieve yourself of pressure to invest.
Explain the stock market in detail
The next part will provide you with an explanation of the stock market in detail so that you get a general idea of what awaits you.
The stock market consists of stock exchanges such as the New York Stock Exchange and Nasdaq. Shares are listed on a specific exchange that brings together buyers and sellers, and tracks supply and demand and the price directly related to them.
The stock market doesn’t work like a grocery market, you can’t pick your stocks off the shelf to your liking. Sole traders are usually represented by brokers who take on the burden of placing your stock trades and handling the exchange on your behalf.
The NYSE and NASDAQ are open from 9:30 am to 4 pm, and they both offer pre-market and after-hour trading sessions as well, depending on your broker.
Understanding the stock market
When people refer to a stock market that is going up or down, they are generally referring to a major market index.
A market index tracks the performance of a group of stocks that represent either the market as a whole or a specific market segment. You likely hear a lot about the S&P 500, the Nasdaq Composite Index, and the Dow Jones Industrial Average that are often used as proxies for overall market performance. You can invest in an entire index through index funds and exchange-traded funds, or ETFs, that track a specific index or sector of the market.
Stock trading information
Stock trading involves buying and selling stocks repeatedly at different times and taking advantage of short-term market events with the aim of turning a profit. Some stock traders are day traders, meaning they buy and sell multiple times throughout the day, and others are simply active traders, making a dozen or more trades per month.
Investors who trade in stocks rely on technical analysis of stocks, do extensive research and dedicate a few hours to follow the market on a daily basis to get accurate information about stocks and the market in general. You can also use online brokers who provide information about stock trading, including analyst reports, stock research and charting tools.
The difference between bull markets and bear markets
A bear market means a decrease in share prices by a rate that may generally reach 20% or more, according to many of the previously mentioned indexes.
Bull markets are followed by bear markets, and vice versa, both of which often signal the start of larger economic patterns. In other words, a bull market usually indicates economic growth, while a bear market shows a decline in investors, which may lead to a decline in the economy as well.
The good news is that the average bull market far exceeds the average bear market, which is why you can grow your money for the long term by investing in stocks. The S&P 500, which holds about 500 of the largest stocks in the United States, returns an average of about 7% annually. This means that if you invested $1,000 30 years ago, you could have about $7,600 today.
Stock market crash and correction
A correction occurs when the stock market drops 10% or more, while a stock crash refers to a sudden and very sharp drop in stock prices, as happened in October 1987 when stocks fell 23% in one day.
As we mentioned earlier in our stock breakdown article, most bull markets last longer than bear markets, so it’s important to focus on the long term if you’re worried about something happening. It can be hard to watch the value of your portfolio shrink when the stock market goes down without doing anything, but in long-term investing, doing nothing is often the best strategy.
According to an online survey, thirty-two percent of Americans who have invested in the stock market have withdrawn most or at least part of their money during recent financial downturns. The survey also found that 28% of Americans would refuse to keep their money in the stock market if a crash occurred.
These Americans would rethink withdrawing their money if they knew how quickly the market could rebound, which took only 13 months in 2015. And if you’re wondering why you have to wait years for your portfolio to go back to zero, remember what happens when you sell your investments in Downturn: loss.
The importance of diversification
It’s impossible to completely avoid bear markets, but what you can avoid is the risk that may result in an undiversified portfolio. Diversification helps you protect your portfolio from the inevitable market setbacks, as you group multiple types of stocks together to achieve balance.
Building a diversified portfolio of individual stocks can take a lot of time and patience, so you can use index funds or mutual funds that automatically contain a basket of diversified investments. An S&P 500 index fund, for example, aims to mirror the performance of the S&P 500 by investing in 500 diversified companies in that index.
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