Stock Basics to Know Before Investing

You never want to jump blindly into the stock market.

From the basics to the more advanced strategies, it’s important to know what you’re getting yourself into–plus where and when to apply the best tools. And knowing those tools in advance will often lead you in the most fruitful direction.

When you start investing, you’ll need to consider what you need, what you’re paying for, and what’s really worth what. But in order to do that, you’ll need to do your homework on the stock market first.

So let’s get to studying.

Have a Strong Grasp of the Basics Before Diving in

Before you invest, learn the basics of the stock market.

As the old saying goes, there is no stock market, just a market of stocks. You should focus your attention on individual securities along with the general relationship with the broader economy. You should explore the factors that drive your stock.

Before entering the market, it’s good to be familiar with stock terms and their meanings, including financial metrics and Market Cap, for instance. Explore the different market analysis styles as well. Knowing how to employ as many tools as possible will help you make the smartest investments at the right time most often.

The biggest mistake people tend to make is skipping over a basic understanding of the stock market basics. As with all things, grasping the fundamentals is not just the best way, but the only way, to really build on your skillset and knowledge. With stocks, the more you know, the better off you’ll be. But not everything can be foolproof.

Once you have a general understanding of what’s what’s in the stock market, you’re ready to begin implementing your best tools and strategies.

Buy Low, Sell High Strategy

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It might sound self-explanatory, but it’s a strategy worth learning about more in-depth. As explained by Investopedia, “buy low, sell high” is where you buy stocks or securities at a low price and sell them at a higher price. Market trends can be difficult to predict, so this tactic is best applied with other tactics simultaneously.

Typically, the thinking behind buy low, sell high is somewhat collective. Many believe a pure herd instinct tends to drives stock prices. And so, it’s useful to take an unbiased look at the market to see herd instinct in motion and potentially take advantage of the ups and downs that take place. However, you shouldn’t base your decisions on what others are doing. Instead, allow it to inform you of how others might be thinking in any given stock market moment. On occasion, it can be illuminating.

While a good and objective strategy, it’s not necessarily one that can be implemented on a consistent or foolproof basis. So, it’s important to consider other factors that play a part in market trends like moving averages, business cycles, and overall consumer sentiment. You should use every stock tool in your tool shed, so to speak.

Understand Moving Averages

In matters of finance, a moving average (MA) is derived from price history and shows price fluctuation over periods of time. It’s a stock indicator commonly used in technical analysis. Instead of assessing the market by temporary bumps along the way or current investor attitudes, it’s a look at the bigger picture. The bigger picture will always give you a better grasp on the direction a stock is moving over time.

Per Investopedia, “the point of the moving average is to help a trader time a buy or sell at the right point in the trend.”

Business Cycle and Sentiment

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With the stock market, patterns are always important to take into account. In the big scheme of stocks, drivers of the market tend to follow a consistent pattern, often going back and forth between striking while the iron is hot and then being exceedingly cautious, and then striking again. Or as some put it, the oscillating pattern of greed and fear.

Financial experts say in a period of maximum fear, it’s the ideal time to buy stocks. In turn, a period of maximum greed is considered the best time to sell. When looking back through the history of stocks, extreme periods like these always take place a few times every decade and the investors never stray too far from the pattern.

As noted by Investopedia, “the emotional cycle follows the business cycle. When the economy is in a recession, fear predominates. This is the time to buy low. When the economy booms, prices go up like there’s no tomorrow. This is the time to sell.”

Simply put, think of the business cycle and sentiment as market timing tools, but never rely solely on what’s being predicted. When it comes to the stock market, nothing is guaranteed. There’s no such thing as a sure thing. You will always be taking a calculated risk with stocks, no matter how or when you approach investing. So the more you know, the better your odds.

Familiarize Yourself With Filings

According to Forbes, “there’s no better starting point than the regular filings public companies make with the SEC, which are required to detail everything from company finances to potential conflicts and risk factors.”

The annual 10-K will equip you with the most information. It entails quarterly financial numbers, annual financial numbers, business line descriptions, and inside information about growth opportunities, and costs. Per Forbes, regulatory filings detail any senior management changes, acquisitions, and stock transactions by executives or board members as well.

To learn the nitty-gritty about U.S. public companies and foreign companies listing U.S. exchanges, check out the SEC’s EDGAR system online.

What to Invest in the Beginning

Financial experts say it’s wise to only invest your surplus funds. Oftentimes, one of the biggest mistakes first-time investors make is investing funds they can’t afford to lose. This is never the way to go. Since investing in the stock market is always a risk, there’s always the chance you may lose a lot of money, and potentially, all of it. So familiarize yourself with possible risks to avoid them.

According to Financial Express, “some are the risks related to the overall market as the systematic risk that you can’t avoid by diversifying your portfolio, while some risks are stock-specific that you can avoid. You need to decide your own risk tolerance considering your age, financial strength, retirement goal, etc, and accordingly should take the risk.”

If you’re ready to take risks in the stock market, invest only your surplus funds. In other words, only invest the funds you can afford to fully lose. The stock market is no place for your emergency funds and so forth.

Diversify, But Don’t Spread Your Funds Too Thin

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Putting all of your money into one stock is never advised. Instead, you should aim to create a well-diversified portfolio of stocks. This can help you reduce the risks and prevent losing all of your money if one stock plummets or doesn’t do as well.

With that said, avoid over-diversification. If your goal is for your investments to grow (and obviously, it should be), investing in too many places could very well prevent or interrupt the proper growth moment.

No matter where you invest, it should be a choice about the quality of investments over quantity. While you want to diversify, you always want to make the most informed investments you can to reap maximum benefits.

“Timing the Market” Is Not Your Safest Best

Yes, timing is everything, but you shouldn’t attempt to time the market. Or rather, you shouldn’t be solely relying on timing to tell you when to invest. When it comes to investing, you’ll want to take a more disciplined approach, and apply all tools, with market timing as a crucial factor, but not the only one.

Many investors do try to time the market, no matter how many warnings financial planners often heed. And many times, they lose a major chunk of their money in the process. Per Financial Express, “no one is able to successfully and consistently time the market by catching the tops and bottoms over multiple business or stock market cycles.” So be cautious with this “strategy.”

Consider investing small amounts of money over a period of time. The idea is to average the market. Approaching investing from this frugal and expansive angle, you can benefit in long-term ways. Oftentimes, those who wisely invest money in the right shares systematically over an extensive period tend to generate better returns. So no matter where you plan to invest, be patient and divvy out those dollars slowly but surely rather than all at once.

After all, the key to wise investments is often discipline and never allowing emotions, “the herd,” or assumptions about market timing to lead you to rash decisions.

Be Aware of Market News, But Be Wary

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Obviously, to be “in the know,” you will need to stay informed about what’s going on in the stock market. However, do not let what you hear be taken as the final word in what decision you should make. That is something you should still be figuring out on your own, with your variety of tools, and built upon basic understanding. In other words, pay attention to what you read, but always take it with a grain of salt.

Overall, the goal should be to learn enough to make informed investments that lead to financial growth. Never invest in assumptions. Because of all the unavoidable risks that come with stocks, blind investing is not one worth taking.

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