Stocks - Getting Started in the Market
Hollywood loves the stock market. The chaos of the stock exchange floor, the tension of boiler room day-trading, devious power brokers making back room deals; it all makes for great drama. Then you have the true-to-life stock market stories in the news: insider trading, big money IPOs, the dot com bust. All of it is enough to make you steer clear of the market for good and travel down a safer investment path. But donít be frightened, history shows that long-term, thereís no better place to put your money to watch it grow. Here are a few tips to get you started.
Simply put, when you purchase stock in a company, you become part-owner of that company. Along with other shareholders, you all combine as investors in the business, and therefore reap its rewards, or suffer its losses. Stocks are most commonly divided into separate categories depending on the size and type of the company (e.g., mid-cap, small-cap, energy, tech, etc.).
While speculation can drive stock prices in the short term, itís long-term company earnings that determine a stocks gains or losses. Speaking of short term, thatís when stocks are extremely volatile. Over a span of just a few months or years, stocks can climb to astronomic heights or drop to pitiful lows. But, since 1926, the average stock has returned over 10 percent per year. Thatís better than any other investment vehicle out there, and thatís why stocks are your best bet for long-term investment.
Before you dive head-first into the market, there are a few things you should know about picking stocks. First, the marketís performance as a whole is not necessarily a reflection of its individual stocks. Good stocks can keep growing even in a down market, while bad stocks have the frustrating tendency to drop or remain stagnant in a strong market.
Also, remember that history is not indicative of a stockís future performance. Even solid stocks can slip from time to time. Remember that stock prices are based on a companyís earnings outlook, not its past performance. If the future looks bright for a company, a 0 dollar stock is probably a good buy. If earnings look less than promising, even a stock can be a waste. Finally, investors determine a stockís value by measuring a handful of primary criteria, most notably cash flow, earnings, and revenue.
Itís the rallying cry of all smart investors. When compiling an investment portfolio of stocks, itís smart to own shares in companies from several different industries. Consider it a ďhedge betĒ. When one part of the economy experiences a downturn, youíll have other stocks in your portfolio to put your faith in.
When building your portfolio, the safest bet is to pick from financially strong businesses with earnings growth above the average. Surprisingly, that limits the lot to choose from, as only around 200 stocks today fit that bill. A solid portfolio features somewhere in the ballpark of 20 stocks selected from seven or more industries. A general rule of thumb is to invest in stocks with an above-average rate of growth and reasonable valuations.
Buy and Hold
Day trading is a great way to lose your nest egg, but quick. As we noted before, stocks over the short term are highly volatile. Sure, brokers today are offering cheap trades, but beware. There are a ton of hidden fees and taxes involved with day trading, not to mention the amount of attention required by you to monitor the blow-by-blow proceedings of the market. Our recommendation: buy and hold. A ten percent return over the long term is nothing to sneer at.
About the Author: Joseph Kenny writes for the Personal Loans Store which offers information on loans and other loan types including home loans, secured loans and others.
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