The Stock Market For Beginners: 7 Starter Tips

Other pages in this 'Stock Market For Beginners' section of the site look at the kinds of things that a new investor should do to help themselves. However, these were written in essay format and so for some time it has been on the 'to do list' to make a list and simplify the stock market for beginners tips. 

Here we go...

1. Investing is not a hobby. To big merchant banks, it is a very competitive business. Therefore, you should also treat it as a business. That means understanding your own profit and loss as well as the companies in which investments are made.

Once this thought pattern is established, it makes the whole process so much easier. Simply ask, "Will this investment / trade / software / subscription make or lose me money?" Once an answer has been established, a clear course of action will present itself.

2. Get some great investment management software. These days, a speedy internet connection and good money management and investment software costs virtually nothing. Why spend the time and effort trying to figure out the best ways to do things when solutions already exist.

Ideally, look to purchase two types of software. One will be for personal money management. This can be used for profit and loss and keeping track of the costs of subscriptions, stockbrokers and the like. The other will be used for tracking stock and fund prices, storing company news, technical and fundamental analysis and more.

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3. Get an education. Warren Buffett has suggested in the past that every investor should be able to understand basic accountancy principles, an annual report and stock market history. You probably do not need to become an accountant, but being able to understand the scoring system of the game can only help.

4. Learn about money management. Every investor will have the occassional (at best) loser and it is vital that no individual holding can wipe out a portfolio. Understanding asset allocation is vital.

Years of talking to people about investments has taught me that there are fundamental differences between the way investors behave. New investors ask for 'a tip' and want to know, "What should I buy?".

In contrast, professionals do not want tips. They have dozens of good ideas of their own. They won't be sharing those ideas with you and they will not be expecting you to share yours. Instead, they ask about how you allocate money. "Which sectors and markets do you like and why?" The difference between these approaches is like night and day.

5. Read widely. Getting a wide ranging education in personal finance, corporate finance, taxation, economics and investment theories will help. However, finding areas of the world or business in which you can become relatively expert can help in the process of finding investments.

The reality is that in the modern world - especially with the power of the internet - there is very little information that is not in the public domain somewhere. However, the world now has information overload. Whilst the information might be available, few people now have the time to find or understand it. The people who know these things and can 'join the dots' have regular opportunities for stock market investment.

Once the basics have been covered and understood, it may be that just one or two hours of reading each week will be enough to keep knowledge up to date. But keeping up to date is vital.

6. Find a good investment service to subscribe to. Many of the suggestions above can now be covered by joining just one stock market service. These services now aim to pick stocks, offer trading and portfolio management software and educational services too. If things go well, then by investing in the stock market picks, the service can be paid for with profits.

Though these services are often not 'cheap' they are generally very valuable and can help to make an investor or trader profitable whilst learning the ropes. This is a great way to learn or experience the stock market for beginners.

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7. Practice makes perfect. In the investment business, paper trading is how we all start. Pick a couple of companies, make a note of their price, the date, the reason why you want to buy them and then start following the stock.

As time passes, the hunch or assessment which made the stock such a great prospect will play out. Was it a good or bad decision? Would buying the stock 'for real' have made a profit or a loss?

From: Stock Exchange Secrets

Warren Buffett's Cartoon The Secret Millionaire's Club

The Stock Market - A Beginner's Guide

How the stock market works. 

The stock market is driven by supply and demand. The number of shares of stock dictates the supply and the number of shares that investors want to buy dictates the demand.  It's important to understand the for every share that is purchased, there is someone on the other end selling that share (or vice versa).  The stock market is really just a big, automated superstore where everyone goes to buy and sell their stock.  The main players in the stock market are the exchanges.  Exchanges are where the sellers are matched with buyers to both facilitate trading and to help set the price of the shares.  The primary exchanges are the Nasdaq, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and a few other regional exchanges like the American Stock Exchange and the Pacific Stock Exchange.  Years ago, all of the trading was done through the traditional exchanges (like the NYSE, American and Pacific Exchanges) but now almost all of the trading is done through the Nasdaq, which uses ECNs and thousands of other firms with access to the Nasdaq to facilitate trading.

Here's an example of one of the many ways that the stock market works:

You open an account with E*Trade.  You send E*Trade a check for $1,000.  E*Trade deposits the check into a trading account that is listed under your name.  You log onto E*Trade and place an order to buy 100 shares of a stock in Company A, which is currently trading at $5.  E*Trade uses it's network to tell the Nasdaq and all of it's related networks that there is demand for 100 shares of Company A's stock.  The Nasdaq finds someone who is willing to sell 100 shares of Company A and, instantaneously, they execute the trading of stock between you and the person selling the shares.  The trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you.  Basically, the clearinghouse will designate 100 shares of Company A to E*Trade and E*Trade will designate those 100 shares as yours.  The actual stock certificates are typically held "in street name" and never really need to exchange hands (although you could request that the stock certificates be transferred to your name).

In a nutshell, that's how the stock market works.  The stock market is really just like any other marketplace - it facilitates the exchange of goods between interested parties and works to reduce distribution costs and set prices.

How stocks are valued. 

Stocks have two types of valuations.  One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand). Both of these values change over time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks.  Let me discuss both types of valuations.

First, the fundamental valuation.  This is the valuation that people use to justify stock prices.  The most common example of this type of valuation methodology is P/E ratio, which stands for Price to Earnings Ratio.  This form of valuation is based on historic ratios and statistics and aims to assign value to a stock based on measurable attributes.  This form of valuation is typically what drives long-term stock prices.

The other way stocks are valued is based on supply and demand.  The more people that want to buy the stock, the higher its price will be.  And conversely, the more people that want to sell the stock, the lower the price will be.  This form of valuation is very hard to understand or predict, and is often drives the short-term stock market trends.

Why the stock market is a good investment (in the long term). 

It’s all about risk and return, and because your money is at more risk in the stock market than if you park it in a savings or CD (by the way, the money you invest in a CD is probably reinvested by the company offering the CD), the potential return is higher. It’s true that the gyrations in the stock market can cause both large losses and large gains, but if your investment time horizon is long enough, these short-term fluctuations will result in relatively high returns. It is generally accepted, that the average long term return from investing in stocks  is 10-12%. This is much higher than the average CD or savings rate of 4-6%.

Why the stock market gets out of whack with reality. 

Over the long term, the stock market is driven by underlying economic, financial and global growth. But in the short run, the market is driven by simple greed and fear, which are dictated by human emotions.  During periods of prosperity, the stock market often rises faster than underlying earnings.  During tough economic times, political uncertainty, and low consumer confidence, the stock market often performs worse than the underlying fundamentals predict.

Recommend ways to invest in the stock market.

• Don’t try to time the market.  As tempting as it is to try, it is not possible to time the stock market.  People have written millions of pages of research on this topic and NO ONE has ever found a legitimate way to determine its trends.
• Use cost averaging.  By buying stocks on a periodic basis (like once a paycheck, once a month or even once a year), you will always be buying at an average price.  If you try to time the market, you may be buying at a high or low valuation.
• Take taxes into account.  When you buy stocks, try to hold them for more than one year so you get taxed at the long term capital gains rate, which is currently 18%.  If you sell your stock before one year, you will be taxed at your ordinary income tax rate, which is almost always higher than 18%, sometimes twice as high.
• Invest as much as possible into tax-sheltered 401K, 403B and IRAs.  By investing in tax deferred plans, you are able to invest money and not worry about the tax implications.  With 401K and 403B plans, you get to invest your earnings before taxes, so the investment will grow on a higher base.  For example, if you received a paycheck for $2,000 gross pay and taxes were taken out, you'd be left with only $1,200 or so to invest.  The investment return on $1,200 could be substantial, but if you could invest that same $2,000 in a tax deferred account, you would be investing and earning a return on $2,000 instead of $1,200.  Also, many employers offer matching investments that could make that $2,000 investment equivalent to a $4,000 investment.  Put as much as you can into these tax deferred investments.
• Diversify your investments.   Don't just invest in stocks.  It is better if you diversify your investments into other asset classes including real estate (a house), cash (savings account or CD) and maybe even bonds.  That way, if one asset class really underperforms, you will have some exposure to the better performing assets.
• Diversify your stocks (mutual funds).  When investing in the stock market, don't load up on just one or two stocks.  Diversify your investments across many stocks. If your portfolio is not large enough to buy 15 or more different stocks, you should consider purchasing one or more mutual funds to ensure diversification.

From: Free Financial Advice

1929 Wall Street Stock Market Crash

Stock Market Hopes: 2010

Wednesday June 17, 2009

With unemployment on the rise as companies shed staff to cope with decreases demand due to the global financial crisis, 2009 has so far been steadfast but expectantly slow in terms of investing in the stock market. This website proves that you can make money in any market with the right trading tools, but for much of Australia, a true market recovery is what many investors are banking on.

While Australia has so far avoided a technical recession and shown great resilience compared to many other nations feeling the effects of the crisis, the downturn has been felt at home as well as abroad. In many cases, speculators from around the world have suggested mid 2010 will be the magic time for true stock market recovery, and the latest report from Westpac echoes this sentiment.

The Westpac Melbourne Institute Leading Index indicated forecast positive growth in 2010, especially after recent positive activity on the market. Westpac has predicted a growth rate of one percent after expected contractions in June and September quarters. The important indicator suggests good news for the stock market and investors looking to capitalise on the current value of shares.

From "Stock Market"

The Definition of Penny Stocks

Low-priced stocks of small companies that usually carry a value of less than $5 are called penny stocks. These type of stocks are traded on the Over-the-Counter-Bulletin-Board (OTCBB) and the Pink Sheets. Both of the mentioned trading venues do not have the same kind of minimum requirements of exchanges as those which are set by the Securities and Exchange Commission for the NASDAQ or the NYSE. Penny stocks are issued by those companies that are either starting businesses or approaching bankruptcy. A new issue of stocks is one way of injecting quick capital that can be used to save the business.

Lack of standards, lack of stability, and decrease of prices are some of the factors that cause penny stocks to be one of the riskiest investments around. Although successful companies experience a great payoff, a vast majority of penny stocks often end in bankruptcy. Here are some of the reasons why penny stocks are considered to be risky:

Lack of information about the company
Most companies have very little reportable history and those which are listed in the Pink Sheets or in the OTCBB aren’t required to issue financial statements.

Low liquidity
Finding potential buyers is difficult because penny stocks are infrequently traded. In order to interest an investor to buy the stock, the price of the penny stocks need to be lowered substantially.

Potential fraud.
Penny stocks, as a result of their unregulated nature, are often sold by con artists through spam emails or off-shore brokers.

Not all penny stocks are issued to gain money by fraud or to deal with bankruptcy. There are some penny stocks which are used to represent hard-working businesses that are struggling to meet the necessary requirements to get listed on NYSE of NASDAQ. Investing in such companies offers real growth potential because investors have the opportunity to get in at the ground floor and ride all the way to the top.

Finding companies with this growth potential is difficult. A lot of research is needed to get this information. Unless they willingly take the time to personally investigate a company, investors could be victimized by fraud. Nowadays, there are some companies that offer “inside information” about which companies sell penny stocks. Investors always have to be extra careful since there are other companies which only serve as fronts for pushing particular stocks on unsuspecting investors.

The two ways to play the penny stocks are to do research and to play craps. Since the stocks come with low costs, investors will not lose vast amounts of money in case the company goes under. Penny stocks are also considered to be interesting additions to any portfolio. It must be stressed, however, that only a small portion of any portfolio should consist of penny stocks because the odds are that most penny stocks will end up in a total loss.

Investors who are interested in buying penny stocks need to find a broker that will place orders for them. Although a lot of brokers will not cover penny stocks due to the difficulty in tracking them, there are some online brokers who specialize in penny stocks. Regulations require brokers to receive a written confirmation from their clients concerning the transactions. Brokers are also required to provide their clients with a document that outlines the risks of speculating with penny stocks.

The current market price of the stock and the compensation amount of the firm has to be disclosed by the broker. They also have to provide their clients with monthly statements that detail the market value of each penny stock in the account.

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