Stock market for dummies
As a guide on investing in the stock market for dummies there are a few things that you need to know before you can even begin investing.
Here is my guide to investing for dummies
Stock markets in simple terms are the place where you can buy shares of a particular company and then sell those for profit later. You will invest in the stock market based on your perception of the market movement and the amount of risk you want to take.
Some one who is selling because he thinks that the market is not good and wants to exit or he has made his desired profits. All in all it is all about market perception that causes someone to buy or sell.
To help you get a market place where you can sell or buy shares there are exchanges like NYSE and NASDAQ.
Each stock exchange has an index which tells you about the general health of the market. You can read more about these indexes namely Dow Jones and NASDAQ-100 here.
You can ideally go directly to an exchange and trade but in the real world it is not that easy and hence you will need go to a broker who has a seat at the exchange and he will in turn execute order on your behalf
Online brokers are discount brokers – then there are discount brokers who are online and you can directly input your orders over there. These brokers have small fees versus the heft fees of the full service brokers. Full Service brokers will give you advice which discount brokers will not.
Stock price or stock valuations
The stock price is arrived based on the future earnings potential of the company. Based on the company’s books there is the actual book value and the based on the future profits you have the market price.
The future earning take in to account macro economic indicators as well as micro economic indicators.
Main indicator is the P/E ratio
P/e ratio is the price to earning ratio. That will suggest the market prices if you know the PE ratio and the earnings. This helps to guess the price for the future.
Most stocks are compared by taking the p/e ratio of the industry they operate in as well as the p/e ratio of the overall market.
Long term investing
Stock markets will in general give you more returns than that standard saving instrument which is the CD over the longer term. In short term it may give you losses also. So better be prepared for long term appreciation and short term notional losses.
Short terms vs. long terms
Market in short term is never about ground reality but in long terms it is all about the health of the company as well as the economy. That is why it s better to invest for a longer term as opposed to short term. If you are a risk taker and have loads of money only then you should start to day trade. You can lose a lot of money in short term or in day trading.
Tips and warnings
Never time the market – If you are thinking that you would be able to exit the stock when it is at its peak that will never happen. You can never know when it is the peak or the bottom. In other words set yourself a target profit and exit the stock at that time. The even if the market goes up or down you have made your money.
Averaging is good.
Always try to buy more of the stock at less prices as that will help in making good returns. You cannot time the market so make sure that whenever the stock price is less than your purchase prices buy some more stock to lower the average cost price. Ultimately the stock price when it climbs up you can make decent profits.
Diversification is better
Never invest all you money in stocks and also never put all your money in one stock. Spread your investments over several things like stocks, Mutual funds, bonds, real estate as well as CD’s. As you near your retirement, put more money into safe instruments as opposed to stocks. Invest in safe defensive stocks, aggressive stocks and cyclical stocks spread across various industries. This will help in case one industry is doing less well than the other.
Hopefully this stock market for dummies guide will help you make good money while investing in the stock market.
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how to get rich with stocks
As a follow up to my earlier post on Get rich off stock market – Get rich investing in good stocks for long term we can safely say that you can definitely make riches with stocks as well as with several other methods.
I am not going to be too deep with this and there is no secret formula to this.
However I am big proponent of two things which are
1) Buy low sell high
2) Averaging the costs
3) Long term investing
4) Small portion of money on volatile stocks
5) Cash at hand is a must
6) Use crisis as a time to buy
Old fashioned as it may seem but these theories are by far the best that I know.
Let us each one of these one by one. In fact each one leads to another
Always buy low sell high – Never start investing when the market is at a bull run and it all time high. Most investors will do that and then will have no cash when the market starts tumbling
Always when the economy is in recession buy the stocks and good stocks are available at dirt cheap prices.
Average out the costs – Again this is a long terms strategy but you can easily use this. Do not but too many stocks at one go. If you thing a good stock has potential then buy say 10 or 20 shares of that stock and sit tight. At every fall accumulate so that your cost of holding goes down.
But yes, if the stock is going to tumble because the company is going to be bankrupt then exit.
The strategy will yield handsome returns only if you invest for a long term basis and also you have a constant supply of cash. This leads to my next point and that is
Long term investing – Always go for the safe bet and that long term investing. In short term as stock market beginner you may need to be very alert as well have huge cash at hand to make money. The risk is too high.
Small portion of money on volatile stocks – have small percentage of your entire corpus invested in volatile stocks and then use the averaging strategy to make money. To use this strategy you need to initially pay small and then sell immediately if you have made money on these stocks. Once you have the money then gain invest in volatile stocks and keep on doing this to make handsome gains. Use cycles which are fifteen days or a month based on the time when you enter the market.
Cash at hand is a must – Always have 20-30% of cash at hand out of the total money which you wanted to invest. The reason is simple it will help to but stocks that are cheap at any given pint in time. It will help in averaging the costs too.
Crisis is good time to buy – Use the crisis as a best time to but the stocks. Again have your list ready of good stocks which are down because of the general market sentiment.
A lot of people invested in Goldman Sachs and Citibank at the height of the mortgage related meltdown a few months ago and now are getting rich.
So in all how to get with stocks is not very tough and the only thing is discipline and focus.
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Get rich off stock market – Get rich investing in good stocks for long term
Yes you are correct I am writing about how to get rich off the stock market? As a stock market for beginners guide I can surely say that you can get rich in the stock market and for that you will need to define your short term money making goals versus your long term money making goals in the stock market
The first step that you need to have is – Have Gameplan and a Strategy
To get rich investing in the stocks you will need to have a gameplan ready with all the attendant details as in how much you will invest in mutual fund versus how much cash you will hand to make sure that you have money to invest in stock when the opportunity arises.
This is the most critical – Almost all of us will usually invest everything when the market is up and then when the market turns the other way round we have no money to cherry pick stocks.
Have a target identified to sell and also have a stop loss defined.
Always make sure that you have a stop loss mechanism in place as that will help make sure that you are limiting your losses else the stocks in a downturn can deplete you your entire war chest in days.
Long term stocks
But a few stocks which have good fundamentals and make sure that you hold them for good. You will make money off them in may be ten years when they would have given you excellent multiple digit returns.
Also have some volatile stocks in the portfolio to make the most of the current market trends. That way you can make some money in the short term and in some cases they also may turn out to be good long term bets.
Get Rich Mutual funds
Pick the right mutual fund and start building your corpus. Always go for the systematic invest plans so that you can have the benefit of low prices and averaging. Also have a systematic withdrawal plan in place so that as and when you have made a certain amount of money in the mutual finds the units can be redeemed and be in place for use in the so called money market or fixed income mutual funds.
Get rich by investing in Gold
This has been said so many times but gold is one commodity if you play it right. The major thing to know about gold is that gold always runs opposite to the market and that is precisely the reason that either you should have some gold mining stock like Homestake mining or invest in a Gold ETF like GDX . There are gold mutual funds specifically in which you can invest
Be contrarian
Warren Buffet has shown time and again that contrarian is good. Fundamentals are too good. He never invested in the booming internet stocks in the market in 1990’s. Good for him bade for market. A lot of people got burnt by the tech mania.
Always think with your head and see what is good and why people are buying a stock. In the bull run you should be selling and in the bear run you should be picking up good stocks to make money later.
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