We all have the names of people who are now billionaires as a result of the stocks market. However, when an average individual invests in the stocks market; they seem not to have similar success. The gap is because of understanding of the stock exchange itself.
When you own a share of stock, you are a part owner of the company with a claim — however small it may be — on every asset and every penny in earnings. As a company’s earnings improve, investors are willing to pay more for the stock.
Sourced from: http://money.cnn.com/pf/money-essentials-stocks/
A stock allows an individual to become the part owner of a company, business, or enterprise. Luckily, we have got you covered with some basic knowledge needed to make it in the market.
- First: Be fast
Downturns occur quickly. Therefore, investment success requires speedy shifts. Waiting for more information or for the dust to settle are common traps for being caught in the downdraft, and then missing out on low-priced opportunities.
- Second: Reject “sophisticated” risk reduction strategies
Following a sharp drop that falls well below the “buy on dips” level, a typical reaction is to reduce portfolio risk by investing in alternative strategies, funds, and issues. Wall Street’s and advisers’ attempts to fulfill this desire typically end up producing confusion and disappointment.
The key problem is trying to allay down market worries while staying fully invested. Currently, Wall Street and advisers are offering “lower risk” solutions that include “low-vol” (low volatility), “alternative,” “hedge fund-like,” and “option strategy” funds and approaches.
- Third: Invest in some cash
When stocks or bonds produce losses, cash is the clear winner. Additional benefits from holding cash are:
A calmer demeanor that allows making better decisions and avoiding emotionally driven mistakes
The funds for buying attractively priced investments
That last point is especially important. The best route to investment success is to buy low, but that takes cash.
- Fourth: Reduce importance of stock fundamentals
In normal times, forward earnings and growth potential are important fundamental stock measures. In bearish times, however, they become weak – not because they are ignored, but because the concerns and uncertainties around the fundamentals reduce confidence in the numbers, themselves. Moreover, economists and analysts are slow to adjust to a negative outlook scenario.
- Fifth: Avoid screening for stocks to buy
There are insurmountable problems to performing screens in downtrends.
Earnings and growth data are unreliable, as described above. Importantly, they will be just as unreliable at this down market’s bottom, wherever that may occur.
Higher dividend yields (currently being used in articles recommending stocks) are questionable. Stocks are still being analyzed individually, so higher yields mean higher risk. For example, Chevron CVX +1.15%’s 5.7% yield makes it a popular recommendation (JPMorgan just upgraded the stock). The yield is high because oil prices are well below Chevron’s business-based projections. With large capital outflows committed through 2017, there has been little left over for dividends.
Low price picking has bad rationale (e.g., looking for stocks well below their 52-week highs and/or 200-day moving averages). The problem is that we are in a bearish period, and that necessarily means prices are going to be much lower than they were. To screen on “price lowness” is to presume either that those higher prices are still valid valuations, or that some stocks are down too much. Neither is a proper assumption.