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.

Brokers

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.