web stats

10 Best Ways to Understand the Stock Market

I’ll share a secret of my success with you when it comes to investing or trading in the stock market. Nothing comes easy without practicing. It took me 10 hard years from losses to gains to feel real comfortable in my knowledge as a trader in the stock market. I no longer trade stocks as often as I did. However, I have incorporated this same idea with mutual funds in my retirement account which had given me consistent 25% annual returns over the past 10 yrs. With a small amount of money, I was able to achieve my goal, which was to retire my husband early, and that was without contributions.

stock market
stock market

I have had so many of my friends and acquaintances come up to me and say they have always wanted to learn about the stock market. However, even though I offer help, they don’t follow through to sit with me. There is no osmosis to teach you to be a good investor or trader. You have to experience losses. There is not one good trader out there who didn’t suffer a loss. However, that was always the best way to learn. I have put together what I feel are ten good tips to start you on the right foot. I would caution you to paper trade first, before buying your first stock if you are still unsure. This means you are practicing on paper your “buys” and “sells”. You can build confidence by paper trading first.

Here are ten good tips on how to enter the stock market:

1. Only invest what you can afford to lose.

Because there is risk in the market, you need to realize you can lose all your money. Hopefully, you wouldn’t ride the stock all the way down, however, I have seen beginners do that because they didn’t understand risk.

2. Check your emotions at the door.

This gets back to confidence. Whether you are a long or short term investor, you have to have some kind of strategy plan of buying and selling. This incorporates setting your own targets on when you sell no matter how high the stock goes or knowing when to cut your losses if the plan isn’t going well. Some people get greedy and keep holding on a stock, riding it up, even though it met their price objective on when to sell, only for it to turn quickly and reverse down. The opposite holds true too. You need to have a fulcrum, a line in the sand on when you would sell your loss. No matter what Gordon Gecko said about “greed being good”, it’s not. This is where “due diligence” comes in; whether you prefer looking at the stock on a fundamental or a technical basis, it’s your choice. However, don’t allow your emotions to control you.

3. Never take a “hot tip” unless you do your own due diligence.

Someone says “hey, I heard that Apple is going to go to $200 because it has a new product that is going to rock the market”. This might be true. However, you should look at a chart to see how much it has gone up in a short period time. You could be buying at the top for a while and that $200

target might not come for another two years. In other words, you can get a better entry point rather than sitting on a potential loss for two years. This is why I prefer technical analysis over fundamentals. With technical analysis, I look on a chart for the actual performance and not have “hope” determine my decision. Things can change very quickly. All of a sudden, there could be a problem with that new product, or a law suit. With technical analysis you can see the truth. Fundamental analysis has to do with all the financial statements, going forward statements, and news that affects the company. Each quarter a company reports their earnings. If you learn about technical analysis, you can see the real trend. You can’t see that with fundamental analysis. However, no matter what, realize that nothing is 100% accurate.

4. Know how to take a loss and not to hold until you make a gain.

Listen to the stock market and be sensitive on what it is telling you. There could be something massively different than what you originally thought. Do not be married in a stock position, or you might find yourself divorced and poor.

5. Read investment forums.

These are the people who are actively participating in the market, the traders. You can tell who knows technical analysis when you see the ‘lemmings’ are following them. The good traders are sharing their experience with you free. Many have really good systems that you won’t find in any book. Some have just some simple technical analysis that might work for you. However, this is also the best way to understand technical analysis, by following the traders. Many make their calls and you can see if they are correct. With technical analysis, it will teach you when to get in and out of a stock. This is helpful whether you want to be a short or long term investor.

6. Check you ego at the door.

Just because you “got lucky” on one stock and made a lot of money does not mean you have the ‘Midas touch’. Even the best traders get cocky. That can cause complacency and losses.

7. Be willing to change your strategy if it is working.

Because of losses I incurred when I was a newbie in the market, I have fine tuned my strategy constantly over the years. What worked before might not work for me any more. You recognize that when you get a loss. Why? The reason is because the market keeps changing and so must you. Knowledge is good. However, at the same time, the more people on a collective basis learning technical analysis, the more the market makers are constantly finding new ways to trick you. Market Makers are the ones that make the actual trade on the floor. That’s where some or all your commission is going to.

8. Keep control of your financial future.

You are the best one to control your financial future. You understand your risk the best. The more you learn the better you will get. When you are empowered with tools and information whether it is from books or investment forums, you can easily surpass any returns compared to the infinite wisdom of a full service broker. You have good and bad brokers offering good and bad advice. They are in it for the commission. You are in it for creating wealth. Over the years, I have learned that best way to create wealth is by managing my own risk in my investments. This applies to all my investments even outside the stock market.

9. Don’t get complacent with your stocks.

Decide on a time table if you are going to be a long term investor and keep tabs on the progress. A “set it and forget it” strategy most times does not work. Let’s not forget what happened in 2000-2002 when we saw portfolios be given a 20-30% haircut. One main reason is this is not your father’s market. The buy and hold strategy does not work as well as it did before the World Wide Web came about in the mid 1990’s.

In addition, liquidity drives the market. When rates are low, there is more liquidity which helps stocks. Investors are able to borrow more easily. Traders especially borrow on what is called “margin accounts”. It’s
like taking a line of credit with your stocks as collateral. This goes around the world because we are globally connected. This is the reason you see big swings in the market because people don’t want to hold a position while they are in a “margin” position for a long term period. The more liquidity the more we go up. So if you hear that interest rates are going up, well, you might want to start monitoring your stocks because if rates go up too fast, it creates tight credit which keeps more money from coming into the market. That will take the market down.

10. Understand the trend.

Wall Street has a saying, “the trend is your friend”. Understand where the trends are and what indexes are leading, i.e. oil, technology, banks, biotech, etc. If you don’t understand where the trend is, subscribe to a technical analysis site or newsletter to learn.

One indication you can use for a trend is to look at the magazine covers. When you see a lot of bears on the magazines, it is a period when there is an extreme bearishness in sentiment. This is indicative of an exhaustion of selling.

Typically, “Smart Money”(big players in the market) will go in the opposite direction which is up. This is called being a “contrarian”. If a bull is on the cover, then we are ready for a down swing. That is because we are getting an exhaustion of buying. Most people come late to the party either way because of not understanding the mechanics of the stock market.

Presently, we are seeing a lot of bearishness with all the talk of recession and sub prime crisis. That doesn’t mean we don’t get a recession. Nor, does it mean the sub prime issue will go away. However, it doesn’t mean the stock market can’t go up either. Most times those magazines are an indicator of the opposite of what is happening in the stock market. Presently we are seeing a lot of bear pictures in the media regarding the market. You can monitor this for the future to see the direction.

stock exchange
stock exchange

11. Ok, I said ten best tips, but I’m going to give you one more.

Here is my forecast, with a disclaimer to do your own due diligence. In my opinion, the market is always pointed up in the future. It is possible it can go way beyond that. However, being a trader, I trade as I see changes and always follow my tips above. Expect dips along the way, but there are a lot of good technical indicators pointing up. One of them that I use along with chart watching is called “Point and Figure” technical analysis. It’s a good trend watcher because it is about supply and demand in the stock market. It shows you what is really going on internally. Presently, we have had indicators turning up starting August 22nd. You can read more about this on Tom Dorsey’s Point and Figure site (see below). You can get a free three week trial period. He also has a book out on the subject. If you really want to understand trends, I would advise to use this. It is not for short term trading. It is for long term investing. This is the best tip you will have as a long term investor.

Now, these are eleven best tips for you. However, the best one that I have not disclosed which you would think is a common sense tip, is don’t just put your hard earn money into the market without knowing what you are doing.

 

 

References:

Vanguard: Helping you reach your investing goals | Vanguard

For people who invest directly in individual accounts (including IRAs and … For people who invest through their employer in a Vanguard 401(k), 403(b), or other  …

Investments – Edward Jones: Making Sense of Investing

We know how tempting it can be to try to time the market or invest in the hot stock of the day, but we believe a long-term, diversified investment strategy is a much …

Warren Paine

Warren is the senior mortgage loan officer who has worked in mortgages and loan industry since 1995. He study in Harvard and major in Finance with a Bsc. Honor Degree. He possesses a Paralegal Certificate as well.

Recent Content