Stock Market Investment For Novice Traders

01
October

The stock market holds mysterious, exotic power for many individuals. To those who have truly become imbibed with the glamour of stocks, the market can seem to have a mind all it’s own. This is what makes speculative stock bubbles so dangerous: when everyone starts losing their heads to the thrill of watching the value of their holdings go up, it is easy to forget that every rise in stock prices eventually leads to a fall.

While speculative bubbles unfortunately seem to make the stock market appear capricious and untrustworthy, the stock market actually plays a vital role. Businesses who want to raise money can offer the ownership of their business publicly. A business does this by splitting itself up into shares, sometimes hundreds of thousands or millions of shares. These shares are offered to the market for a price based upon the current valuation of the entire business.

For example, a business that is worth $100 million dollars offers ten million shares to the stock market. The initial share price is calculated by dividing the valuation of the business by the number of shares. In this instance, $100 million divided by ten million shares equals about $10 per share. Once those shares are released into the stock market, the investors who hold those shares can buy more shares or sell them in favor of the shares of other companies.

There are two types of individuals who participate in the stock market: investors and traders. Sometimes these two categories can overlap, but generally speaking an investor is someone who uses their money to buy stock in order to build up a nest egg. A trader is someone who buys and sells shares in the hopes of making a profit. The perspective of a trader is very short-term, usually within the space of a single day. Such traders are called “day traders”, and day trading has become popular among novice and experienced investors seeking to make a profit without much work.

Stock market trading is a complex subject that involves an understanding of many different subjects. Professional traders spend years educating themselves on all areas of finance, from derivatives to insurance. Since the stock market is interconnected with other financial markets such as the bond market and the derivatives market, a change in one will likely precipitate a small or large change in another. Traders need to be aware of these changes, which is why so many of them are seen glued to news broadcasts as well as to the prices of favored stocks.

For better or for worse, in the short-term investing in the stock market is a highly emotional and sometimes completely irrational experience. On a daily basis, traders can behave very erratically and consequently bid the prices of stocks up or down. This is what makes trading so dangerous for new investors: they can be swept away by the ebb and flow of different favored stocks and potentially lose a large amount of money.

Each investor needs to develop their own strategy. A strategy is made up of principles that concern when to buy and when to sell stocks. These strategies are characterized according to the primary behavior of investors who follow them. For example, a “buy-and-hold” investing strategy consists of buying quality stocks and never selling. The best known practitioner of this philosophy is the famed Warren Buffett, the Oracle of Omaha.

Another strategy is known as market timing, in which investors attempt to buy into the market when stock prices are low, and sell them when they are high, thus earning a profit on the difference. These two strategies are only two of many, but they are demonstrative of the range of ideas about approaching the stock market. Since each trader by human nature can only deal with a certain level of risk, which is the chance that their investment will lose money or be lost entirely, the strategy they choose needs to take their risk tolerance into account.

A good strategy will also pay attention to asset allocation principles, which are a basic part of diversification. Diversifying means investing in different assets, such as stocks, bonds, derivative instruments, money market accounts, etc. A strategy that uses risk tolerance and asset allocation will provide the investor with a great way to make money while being able to sleep at night.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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