Succeeding on the stock market, some basic tips
News, Hollywood movies and TV all assume you know what the stock market is and how it works. Everyone knows that you can make a lot of money in the stock market and be successful if you know what you’re doing, but beginners often don’t understand how the market works and exactly why stocks go up and down.
We wrote about this in a previous article, which you can read here.
. Here’s what you need to know about the stock market before you start investing.
What is the stock market?
Shares, are securities that give shareholders an ownership interest in a public company. It is a real stake in the business, and if you own all the shares in the business, you control how the business operates. The stock market refers to the collection of shares that can be bought and sold by the public on a variety of exchanges.
Where do shares come from? Public companies, sometimes called listed companies, issue shares to finance their activities. Investors who believe the business will prosper in the future buy these share issues. Shareholders receive any dividends plus any appreciation in the share price. They can also see their investment shrink or disappear completely if the company runs out of money.
The stock market is really a kind of aftermarket, where people who own shares in the company can sell them to investors who want to buy them. This trading takes place on an exchange, such as the New York Stock Exchange or Nasdaq. In the past, stockbrokers used to go to a physical location – the exchange floor – to trade, but now virtually all trading is done electronically.
When journalists say “the market was up today” they usually refer to the performance of the Standard & Poor’s 500 or OMXS30. The S&P 500 consists of around 500 large listed companies in the US, while the OMXS30 includes 30 large companies on the Swedish stock exchange. These indices track the performance of the stocks included in the index and show how they performed on the day of trading and over time. They are usually considered a good benchmark for the overall performance of the stock market.
But while people refer to the OMXS30 and S&P 500 as “the market”, they are really indices of stocks. These indices represent some of the largest companies in the US, but they are not the total market, which includes thousands of listed companies.
Of course, you need a brokerage account before you start investing in shares. As you begin, here are eight more guidelines for investing in the stock market.
Some basic tips for investing in the stock market
1. Buy the right investment
Buying the right stock is so much easier said than done. Anyone can spot a stock that has performed well in the past, but predicting the performance of a stock in the future is much more difficult. If you want to succeed by investing in individual stocks, you must be prepared to do a lot of work to analyze a company and manage the investment.
When you start looking at statistics, you have to remember that the professionals look at each of these companies with much more accuracy than you probably can as an individual, so it’s a very difficult game for the individual to win over time.
If you’re analyzing a company, you want to look at a company’s fundamentals – such as earnings per share (EPS) or a price-to-earnings ratio (P/E ratio). But you need to do so much more: analyze the company’s management team, evaluate its competitive advantages, study its finances, including its balance sheet and income statement. Even these items are just the beginning.
Keady says that going out and buying shares in your favorite product or company is not the right way to invest. Also, do not rely too much on past performance as it is no guarantee for the future.
You have to study the company and anticipate what comes next, a tough job in good times.
2. Avoid individual stocks if you are a beginner
Everyone has heard someone talk about a big stock gain or a good stock pick.
What they forget is that they often don’t talk about the specific investments they also own that went very, very badly over time. So sometimes people have unrealistic expectations about the kind of returns they can make on the stock market. And sometimes they confuse luck with skill. You may be lucky to occasionally pick a single stock. It is difficult to get lucky over time and avoid the big downturns.
Remember, to make money consistently in individual stocks, you need to know something that the forward-looking market is not already pricing in the stock price. Keep in mind that for every seller in the market, there is a buyer for the same shares who is equally confident that they will make money.
An alternative to individual shares is an index fund, which can be either a mutual fund or an exchange-traded fund (ETF). These funds hold dozens or even hundreds of shares. And every share you buy in a fund owns all the companies in the index.
Unlike shares, mutual funds and ETFs can have annual fees, although some funds are free.
3. Create a diversified portfolio
One of the main advantages of an index fund is that you immediately have a number of shares in the fund. For example, if you own a broadly diversified fund based on the S&P 500, you will own shares in hundreds of companies across many different industries. But you can also buy a narrowly diversified fund focused on one or two sectors.
Diversification is important because it reduces the risk of one stock in the portfolio hurting the overall performance a lot, and it actually improves your overall return. However, if you only buy a single stock, you really have all your eggs in one basket.
The easiest way to create a broad portfolio is to buy an ETF or a mutual fund. The products have diversification built into them, and you don’t have to do any analysis of the companies in the index fund.
It may not be the most exciting, but it is a good way to start.
When it comes to diversification, it doesn’t just mean many different stocks. It also means investments that are spread across different industries – because stocks in similar industries can move in similar directions for the same reason.
4. Be prepared for a downturn
The most difficult issue for most investors is dealing with a loss in their investments. And because the stock market can fluctuate, you will suffer losses from time to time. You must steel yourself to deal with these losses, otherwise you will be inclined to buy high and sell low during a panic.
As long as you diversify your portfolio, each individual stock you own should not have too great an impact on your overall return. If it does, buying individual shares may not be the right choice for you. Even index funds will fluctuate, so you can’t get rid of all your risk, try as you might.
This is why it is important to prepare for downturns that can come out of nowhere, as they did in 2020. You need to opt out of short-term volatility to get attractive long-term returns.
When investing, you need to know that it is possible to lose money, as shares do not have principal guarantees. If you are looking for a guaranteed return, the bank account may be better, although the capital will be eaten up by inflation.
The concept of market volatility can be difficult for new and even experienced investors to understand. One of the interesting things is that people will see the volatility of the market because the market goes down. Of course, when it goes up, it is also volatile – at least from a statistical point of view – it moves all over the place. So it is important for people to say that the volatility that they see on the upside, they will also see on the downside.
5. Stay committed to your long-term portfolio
Investment should be a long-term activity. By skipping the daily financial news, you will be able to develop patience, which you need if you want to stay in the investment game for the long term. It’s also useful to look at your portfolio infrequently, so you don’t get too nervous or too excited. These are good tips for beginners who have not yet managed their emotions when investing.
One strategy for beginners is to create a calendar and decide when to evaluate your portfolio. Sticking to this guideline will prevent you from selling out of a stock during certain volatility – or not getting the full benefit of a well-performing investment.
6. start now
Picking the perfect moment to jump in and invest in the stock market usually doesn’t work out well. No one knows with 100% certainty the best time to enter. And investing is meant to be a long-term activity. There is no perfect time to start.
One of the key points of investing is not just thinking about it, but getting started. Because if you invest now, and often over time, that mix is what can really drive your results. If you want to invest, it is very important to actually get started and have … an ongoing savings program, so that we can reach our goals over time.
7. Avoid short-term trading
Understanding whether you are investing for the long-term future or the short-term can also help determine your strategy – and whether you should invest at all. Sometimes short-term investors may have unrealistic expectations of growing their money. And research shows that most short-term investors, such as day traders, lose money. You are competing against powerful investors and well-programmed computers that may better understand the market.
New investors need to be aware that buying and selling shares frequently can be expensive. It can create taxes and other charges, even if a broker’s trading commission is zero.
If you invest in the short term, you risk not having your money when you need it.
Depending on your financial goals, a savings account may be a better option for short-term money. Experts often advise investors that they should only invest in the stock market if they can keep the money invested for at least three to five years. Money that you need for a specific purpose in the next few years should probably be invested in low-risk investments, such as a high-yielding savings account.
8. Keep investing over time
It can be easy to dump your money in the market and think you’re done. But those who build real wealth do so over time, by adding money to their investments. This means having a strong savings discipline – putting aside part of your salary – so you can make it work for you in the stock market. You will be able to spend more money on work and increase your wealth even faster.
You can automate the process of investing, which helps to keep your emotions out of the process.
How the stock market works
The stock market is really a way for investors or brokers to exchange shares for money, or vice versa. Anyone who wants to buy shares can go there and buy what is offered by those who own the shares. Buyers expect their shares to rise, while sellers may expect their shares to fall or at least not rise much more.
So the stock market allows investors to bet on a company’s future. Overall, investors set the value of the company at whatever price they are willing to buy and sell at.
While stock prices on the market may fluctuate on any given day depending on how many shares are demanded or delivered, over time the market evaluates a company on its business performance and future prospects. A company that increases sales and profits is likely to see its stock rise, while a shrinking company is likely to see its stock fall, at least over time. In the short term, however, a stock’s performance has a lot to do with just the supply and demand in the market.
When private companies see which shares investors prefer, they may decide to finance their operations by selling shares and raising money. They will conduct an initial public offering, or IPO, with the help of an investment bank that sells shares to investors. Then, investors can sell their shares later on the stock market if they want or they can buy even more any time the stock is listed.
The key point is this: investors price shares according to their expectations of how the company’s business will develop in the future. So the market is forward looking, with some experts saying that the market is anticipating events six to nine months away.
Risks and benefits of investing in shares
The stock market allows individual investors to own shares in some of the world’s best companies, and it can be extremely profitable. Overall, shares are a good long-term investment as long as they are bought at reasonable prices. For example, over time the S&P 500 has generated about 10 percent annualized returns, including a nice cash dividend as well.
Investing in shares also offers another nice tax advantage for long-term investors. As long as you do not sell your shares, you will not owe any tax on the profits. Only money you receive, such as dividends, will be taxable, unless you hold it in a so-called investment savings account, where you instead pay an annual tax based on the value of the account. So you can own your shares forever and never have to pay tax on your profits. But if you realize a profit by selling the share, you will owe capital gains tax on it.
While the market as a whole has performed well, many stocks in the market are not doing well and may even go bankrupt. These shares are eventually worth zero, and they are a total loss. On the other hand, some stocks like Amazon and Apple have continued to skyrocket for years, giving investors hundreds of times their initial investment.
So investors have two major ways to make money in the stock market:
– Buy an equity fund based on an index, such as the S&P 500 or the most popular exchange-traded fund on the Swedish market,
XACT Norden Högutdelande
and hold it to capture the index’s long-term returns. However, its returns can vary significantly. Buying an index fund gives you the weighted average performance of the shares in the index.
– Buy individual stocks and try to find the stocks that will outperform the average. But this approach requires a huge amount of skill and knowledge, and it is more risky than simply buying an index fund. But if you can find an Apple or Amazon on the way up, your returns are likely to be much higher than in an index fund.
Conclusion
Investing in the stock market can be very rewarding, especially if you avoid some of the pitfalls that most new investors experience when starting out. Beginners should find an investment plan that works for them and stick to it during good and bad times.
