Investing in the Stock Market

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Beginners Guide to Investing in the Stock Market

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Deciding to Invest in the Stock Market.

The first thing I should point out is that stock market investing is a very broad topic, and some people have spent their entire lives trying to figure out how it works. The advice on this page is meant to give you an idea of how to get started investing in the stock market and provides links to other references for those that want to learn more.

This article can be useful for anyone interested in investing in the stock market and will give you some basic principles of investing. If you have been working for a long time and have been interested in the stock market but have never invested, the same principles will apply to you that will apply to someone who has just made their college graduation announcements, or is about to start and new job, and wants to immediately invest. You will need to take precautions and invest wisely.

Stock market investing is not necessarily the best use of your savings. Investing in the stock market should be examined and compared to other forms of investment including: savings accounts, money market accounts, CDs, savings bonds, and paying off debt. Obviously, if you can only earn 10% in the stock market and you are paying 20% interest on your bills, your better investment is to pay off debt.

General Principles of Stock Market Investing.

1. You should not invest money in the stock market that you can't afford to lose. Stock investments are not guaranteed, and it is just as easy to lose money, as it is to gain money. If you want guaranteed investments, then stick to savings accounts, CDs, or savings bonds. Those of us that had money invested in the stock market during the recent recession caused by the bank mortgage scandal, and saw their investments lose 30% to 50% of their value, can attest to the volatility of the stock market.

2. No one knows what the stock market will do tomorrow. Whether the stock market will go up or down is not predictable on a daily basis. The stock market is unpredictable because there are many factors that control it e.g. economic trends, economic forecasts, politics, and investor emotions.

3. There are no true stock market "experts". Many people can do well in a raising market; however most lose money when the market falls. If these "experts" are so smart, why aren’t they rich?

4. Only invest in stocks or mutual funds that you understand. If you don’t understand what a company does, then do not buy their stock. Don’t buy into any stock you don’t understand, no matter how, or by whom, it is recommended. If a mutual fund's investment strategy is complicated and hard to understand -- leave it alone.

Investment Strategy.

Invest for the Long Term. Investing for the long term is the best and safest way for an individual to make money in the stock market. Stocks or mutual funds are chosen on their past performance and potential to make further profits. If a company has performed well in the past, it has a better chance of performing well in the future.
Predicting what the market will do on a day-to-day basis is gambling, not investing.

Set up an Investment Plan. The best way to invest in the stock market is to make planned monthly or quarterly investments of the same amount whether the stock market is raising or falling. This method of investing is called "dollar cost averaging". The idea behind this method is that you buy stocks high and low, but over the long run you will make more money than an investor that tries to "time" the market. This method works well with IRAs and other retirement accounts.

What to Invest In.

Mutual Funds. Most beginners start out investing with mutual funds. A mutual fund is a professional company that manages a group of stocks, bonds, property, precious metals , money market funds, etc. for its investors. Investors in the mutual fund pay the fund fees to manage their money for them. All mutual funds charge operating fees. Mutual funds that charge fees when you buy or sell shares are termed "Load Mutual Funds" and those funds that do not charge these fees are called "No-load Mutual Funds".
No-load funds are generally preferable to load funds because you not only keep more of the money you earn, you can also transfer your money into an out of these funds without buying and selling charges. However do be aware that No-load funds do charge management fees, which are taken out of the funds profits as an expense. So it is in fact very possible for a Load fund to out-perform a No-load fund when all expenses and fees are taken into consideration.

The benefits of mutual fund ownership include; a wide variety of investment types to choose from, professional management, and a diversified portfolio (avoiding putting all your money into one stock).

The drawbacks to mutual funds include; paying fees to have your money managed, the failure of the professionals to grow your investment to your expectations, and your inability to influence investment decisions.

Before investing in a mutual fund, you need to decide which mutual fund is worthy of your investment dollars. Rather than doing your own analysis of mutual funds, it is easier if you review the ratings of the funds and read what the experts have to say.

The online money magazines all pick their favorite mutual funds, and provide many tools and articles to help you analyze mutual funds. Some web sites to get you started; www.money.com, www.smartmoney.com, and www.forbes.com.

I would advise you to pick a no-load mutual fund or two that the experts like to start your investment plan. Over time, a fund’s performance may lag, so I would advise you to keep abreast of your funds performance online, by newspaper or other means, at least once a month. If your fund doesn't give you the return you expected, move your money to another no-load fund.

Picking Individual Stocks. Picking individual stocks and learning the mechanics of investing yourself is a much more difficult task than investing in mutual funds. If you do not properly prepare to invest in individual stocks, you can lose your hard-earned investment dollars very rapidly.

I advise anyone thinking of investing in individual stocks to spend some time on the Motley Fool web site (www.motleyfool.com). Read all the articles about individual stock investing and don’t be afraid to get on the bulletin boards. The Motley Fools have also authored several good books on stock market investing. Avoid all get rich quick books, schemes, and investment seminars from questionable sponsors.

Other Types of Investments. There are many other types of investments including those with very high risk and very short periods of investment including; day-trading of stocks, penny stock investments (stocks with a share value of less than $1), and commodity trading to name a few. These types of investments are for the very well informed investor that understands the risks involved. One type of commodity trading, foreign currency exchange, is discussed below.

Brief Explanation of the Forex Market. The foreign exchange, or forex, market is the largest and most liquid market in the world with daily volume turnover exceeding $4 trillion each and every business day.  Trading in this market involves speculation.  Risk profiles are high, and a specialized training is a necessity, hopefully accompanied by the guidance of a mentor or expert in the craft.  Hours of practice on free demo account systems are also a prerequisite in order to refine trading plans, develop technical proficiencies, and secure the consistency and confidence required to perform under high stress market conditions. 

Newcomers will quickly notice that currencies come in “pairs”, as in "EUR USD”, and that the notion of “intrinsic value“ does not exist.  The market determines “relative value” between currency pairs based on assessments of the associated economic well being of each respective country.  “Buy-and-Hold” strategies are the exception, but may apply when long-term “carry trades” are contemplated.

Fundamental economic, financial or political information shapes the market action, and technical analysis provides the basis for optimally entering and exiting the market.  Risk and money management principles must be applied prudently since, on average, losing trades outnumber winners.  Consequently, losers must be cut off early, and winners allowed to run for as long as possible.

Article Conclusion. The main rule to any type of investment is ..."Make sure you understand what you are doing before putting your money at risk!!!"

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