The following guide was created to aid beginner stock market investors in learning all they can about the stock market, why they should invest, and how to get the most out of their investments.
What is the Stock Market?
The stock market is simply a marketplace for the buying an selling of company stock. Companies issue stock, also referred to as shares, as a way of selling partial ownership in that business. Using the stock market, any individual with enough money to do so can buy stock in any company that has shares for sale. Investors purchase shares of companies in the belief that the purchase price will continue to rise, giving those investors a profit when and if the shares are sold.
How are Stock Prices Determined?
Beginner stock investors may hear the term "stock valuation" which is the method used to determine the prices of stocks. The most common of these are Price to Earnings Ratio and a basic valuation of supply and demand.
Price to Earnings Ratio, or P/E Ratio as it is more commonly called, is a fundamental valuation. The P/E Ratio is based on the company's historic ratios and statistics. Using quantifiable characteristics such as these, long term stock prices can be most easily determined.
Simple supply and demand also determines stock value, generally in the short term only. Essentially, when investors wish to purchase a company's stock in large quantities, the price of that stock then rises, making it more attractive and profitable. When investors sell stock in high numbers, stock prices drop.
Why Invest in the Stock Market?
A wise investor attempts to be as financially diversified as possible. Investing in a savings account, money market, CD, or bonds are all wise choices and are very safe locations in which to place money. The stock market is a much more volatile entity than other forms of investments, which allows for the opportunity for great gains along with the risk of great losses.
There are basically two types of investors: those who wish to realize long term profits and those who are after short term gains. Long term investors more often purchase stocks in large quantities and rarely sell their shares soon after purchases are made. These are usually individuals who are saving for retirement or for future generations. Short term investors seek quick turn around on their dollars, purchasing stocks that show promise of raising in price quickly, then selling those stocks for an immediate gain.
Beginner Stock Investors Tips
While investing in the stock market may initially seem to be daunting and even dangerous, it is actually a wise choice to place some savings within the stock market. As long as beginner stock market investors educate themselves before purchasing, they should not have undue reservations about their new assets.
Do not purchase more than is financially feasible. Spending money that one does not have is never a good idea, even when that money is being used as an investment. Also, it is smart to invest first in tax free or tax sheltered accounts like 401(k), IRA, and 529 plans prior to investing in the stock market.
Studying a company prior to making a purchase is a necessity. Be certain that the company has a future ahead of it and has a P/E Ratio that dictates a positive outcome for the investment.
Do not jump on the quick profit band wagon. It is easy to get discouraged when stock prices drop, but that is to be expected when investing in this manner. Do not sell too quickly if the stock(s) purchased is not performing exactly as was anticipated.
Diversify, diversify, diversify. Seek different types of stock in different sectors in order be certain that if a specific industry is struggling, other stocks in the portfolio may perform adequately so as to make up for the losses.
