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The primary role of the stock market is to enable business organizations to acquire capital to finance their activities and expansion. In exchange, the investors are allowed to get returns through capital appreciation or payment of dividends. It is a win/win system- everything depends on how you play your cards. However, it is competitive, risky, and complex as well. This is why the knowledge of its inner workings is important.
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7 Important ThingsYouMustKnow BeforeInvestingintheStockMarket 1. UnderstandWhattheStockMarketIs DefinitionandPurposeoftheStockMarket Itisnecessarytogetanunderstandingofhowthingsworkbeforejumpingstraightintoinvesting.Thestockmarketisnotsomemagicalmoneymachine-itisawell-organizedfinancialecosystemin whichbuyersandsellerstradeorexchangestocksofpubliclytradedcompanies.Incommonterms,a stockrepresentsaportionofabusinesswhenpurchased.Youownashareinthecompany'sprofit(orlosses),soyoubenefitwhenthecompanyperformswellorsuffersaloss. Theprimaryroleofthestockmarketistoenablebusinessorganizationstoacquirecapitaltofinance theiractivitiesandexpansion.Inexchange,theinvestorsareallowedtogetreturnsthroughcapital appreciationorpaymentofdividends.Itisawin/winsystem-everythingdependsonhowyouplay yourcards.However,itiscompetitive,risky,andcomplexaswell.Thisiswhytheknowledgeofits innerworkingsisimportant. Variousstockexchangesarefoundineverypartoftheworld,suchastheNYSE(NewYorkStock Exchange)andNASDAQintheU.S.,ortheNSEandBSEinIndia.Theplatformsaretransparent, regulatedaswell,andhavemechanismsthatsafeguardthecompaniesandtheinvestors. HowdoStocksWork?WhyDoPricesFluctuate?
Thepriceofstocksdoesnothappenaccidentally.Theymovealongwithsupplyanddemand-yes,buttherealreasonsbehindthatsupplyanddemandareacomplexofissuessuchasperformanceof acompany,investorattitudes,economicsignals,interestrates,politics,worldnews,andsoon.The demandforthestockmayincreaseandconsequentlyincreasethepricedueto,say,anunexpected increaseinprofitsbyacertaincompany.Ontheotherhand,negativenewssuchaslitigation,default,oroutragecancausepricestoswingdownwards. • Thisrealizationcanassistaninvestortonottosellduringbearmarketsorsimplybuyintohypestocks.Therearenoreasonstoexpectthatthepricesriseduetoeveryonepurchasing.Themarketis fulloftrends,cycles,andhumanbehaviourwhichattimescanbeunpredictable. • Alargenumberofnewtradersendupthinkingthatthestockmarketisacasino.Itismoreofa garden.Yousow(invest),irrigate(check),andthetimewilldothework.Learningthefundamentals preparesyoutomakesmarterchoicesandhavearealisticexpectation. • KnowYourFinancialGoalsandRiskTolerance • DefiningShort-Termvs.Long-TermGoals • Sowhatisitthatyouareinvestingin?Thisissomethingthatyoushouldknowtheanswertoeven beforeopeningabrokerageaccount.Doyouhaveaplantobuyahomewithinthenexthalfa decade?Tryingtoinvestinyourretirement30yearslater?Perhaps,youwouldliketoestablisha collegefundforyourchildren.Youranswersdeterminewhatiscalledyourinvestmenthorizon-but theseanswersaretheonesthatcount. • Consideringshort-termobjectives,oneistobealittlemorecautious.Youarenotgoingtobetyour housedownpaymentonarollercoastertech.Riskis,however,possiblewhenitcomestolong-term goals,asovertime,onecanadjusttothevolatilityinthemarket.Youcanthinkaboutitasbaking, short-termgoalsarelikemicrowavemealsbecausetheyaresupposedtobegeneratedfastand safely.Investingforthelong-termisaslowroast:ittakesalotoftime,butusuallytastesabitbetter (akaitbringsbetterreturns). • Settingupgoalswillalsoenableyoutoworkoutwhatamountofmoneytoinvestandwhen.When therearenoclearobjectives,youaremostlikelytoeitherpanicincaseofmarketdeclinesorfollow dangerousinvestments. • EvaluatingYourRiskCapacity • Yourtolerancetolosses,i.e.,thecapabilityandreadinesstoabsorblosses,isindividualtoevery investor.Otherindividualsareadrenalinejunkiesandmaybeabletohandlethecrazyvolatilityof thevalueoftheirportfolio.Otherpeoplelosesleepbecauseofa5percentdecrease.Neitheris wrong;itsimplymeansthattheinvestmentstylehastobeatyourcomfortlevel. • Todeterminetheriskappetite,thefollowingquestioncanbeanswered: • Whatwillyouthinkwhenyourportfoliodecreasesinvalueby20percentduringthenight? • Areyouabletolosethemoneythatyouareinvesting? • Doyouhavethetimetomakeprofits? • Thetolerancetoriskalsodependsonage,income,responsibilities,andexperience.Apersonof25 yearsoldandnochildrenwillprobablybeabletotakeonabitmoreriskascomparedtoapersonof
50yearsoldandsavingtowardsretirement.Beingintouchwithyourconstraintsexposesyouto emotionaljudgmentsthattendtomakeyouselllowandbuyhigh,andthisisthelastthingsmart investingcando. • Limitgoalsettingtotheminimal.Startbyexperimentingandadaptingasyoulearnmoreaboutyour financialbehaviour. • GetaBasicInvestmentEducation • Majortermseveryinvestorshouldbefamiliarwith • Beinginthestockmarketwithoutknowingitsvocabularyisjustlikegoingtoanunknownplace withoutaninterpreter.Itwillleadyoutogetlost.Therefore,whenyouwanttoinvest,knowthefew simpleterms: • Stock:Aportionofownershipinanenterprise. • Dividend:thatpartofprofitsthatisremittedtotheshareholders. • MarketCapitalization(MarketCap):Thetotalamountofalltheoutstandingsharesofa company. • P/ERatio(Price-to-Earnings):Thisquestionwillrevealwhetherastockisoverpricedor undervalued • IntheBullishMarket:Thisisanupwardtrendofthemarket. • BearMarket:Amarketthatisgoingdown. • Portfolio:Asetofyourinvestments. • Theseareonlythebareminimum,andgraspingthemwillmakeyougainconfidenceand understanding.Marketgurusaretherewiththeirtallstoriesofunrealisticreturns,andyouwillnot bedeceivedeasily. • WhattoKnowaboutVariousStocksandInvestments Noteverystockisthesame.You’vegot: • Blue-ChipStocks:Consistent,steadfastwithalongtrackrecord(Inc.Apple,Microsoft). • GrowthStocks:Thecompanies,whichareyoungerandarecapableofhighlevelsofgrowth, butarealsoriskier. • ValueStocks:Thesearethecompaniesthatareundervaluedandwhicharethoughttobe sellingtoolow. • DividendStocks:Thesearecompaniesthatissuearegularamountofdividends,sotheysuit theinterestofinvestorswhoarelookingtogenerateincome. • PennyStocks:affordable,tremendouslyvolatile,anddangerous. • Beyondstocks,you’vealsogotETFs(Exchange-TradedFunds),mutualfunds,bonds,andREITs(Real EstateInvestmentTrusts).Eachcomeswithdifferentlevelsofriskandreward.Agoodinvestorknowshowtomixandmatchthesetosuittheirgoals. • Alwaysresearchbeforebuying.Blindinvestingisthefastestroutetoregret.
Start withaSolidFinancialFoundation • ContingenciesandDebtFactors • Examineyourcurrentfinancialsituationproperlyandcarefullybeforeyouthinkaboutyour investments.Doyouhavereadymoneyinanemergencyfund(savingatleast3to6monthsof costs)?Otherwise,createsuchathingfirst.Itispossibletoforecastunpredictablemarkets.Youdo notwanttogetabillfromthehospitalanddecidetosellyourstocksataloss. • Also,lookintoyourdebtposition.Debtsthatchargehighinterest,suchascreditcardbalances,can consumeyourmoneymorerapidlythaninvestmentscanaccumulate.Inmanycases,payingthem offismoresensiblethangoingonaninvestingrampage. • Thesameistruewhenitcomestoinvesting;youshouldneverstartwiththeroof.Youneedastrong financialbase;otherwise,allwillcollapseassoonasthemarkettrembles. • Pre-InvestingPlanning • Youarenotgoingtobeinaroadtripandnothaveyourrouteplannedandfuelledup,wouldyou? Thatishowinvestingissimilar.Makeabudgetandfigureouthowyoucanallocatemoney periodically,normallyonamonthly,quarterly,orannualbasis. • Donotspendthemoneythatmayberequiredshortly.Donotseparateyoureverydayfinancesand yourinvestmentcapital.Thiswilldecreasetheurgetoruntoittocovernon-emergencyexpenses. • Trackyourinvestmentsandmakethemautomaticwithtoolsorapplications.Automationkeepsyou focused,evenincaseoflosingmotivation. • ChoosetheRightInvestmentStrategyforYou • ComparisonsbetweenValueInvestingandGrowthInvesting Twoofthemostcommonapproachesarethefollowing: • Valueinvestmentreferstoasituationwherebytheyfocusonunder-pricedstocks-think WarrenBuffettstyle.Bypurchasingitat50centstoadollar,youthinkthatyouaregettinga gooddeal,andthemarketwillsomedayseethatthisisthevalueofthisdollar. • Throughgrowthinvesting,aninvestorwillpurchaseprimarilythecompaniesthatwill becomebiggerthanothers,regardlessofthehighcostsofobtainingthematthemoment. CDthinksTeslaorAmazonduringtheirstart-up. • Valueinvestingisverypatientandrequiresresearch.Growthinvestingrequireshopeandrisk- taking.Choosesomethingappropriatetoyourpersonality. • Passiveinvestingvs.Activetrading • Passiveinvestingrelatestosetitandforgetit.YouinvestinETFsandindexfunds,andyou leavethemtothelongterm.Itispain-free,economical,andsuitableformostofnovices. • Activetradingmeansbuyingandsellingalottomakeamarket-beatingprofit.Itistime- consuminganddangerous,andusuallybasedonnewsandcharts. • Researchindicatesthatthemajorityofactivetradersareinferiortothemarket.Whenyouarenot preparedtoinvestinajob,passivewouldbethechoice.
BeAwareofMarketVolatilityandEmotionalInvesting • TheNegativeEffectthatEmotionsMayHaveonYourPortfolio • Thestockmarketisapsychological,asmuchasafinancialgame.Eventhemostsuccessfulportfolioscouldbecomevictimsofsuchemotionsasfearandgreed.Youwouldhavehadthesaying buylow,sellhigh;however,inreallife,mostfirst-timeinvestorstendtodotheopposite,buy nervouslywhenthemarketisgoingdown,andFOMO,thefearofmissingout,buywhenithas reacheditspeak.Thissentimentalinvestingresultsinlossesandregret. • Afterthecrashofthemarket,fearcreptin.Thetendencyistocutandrun.However,ashasbeen thecaseinhistory,thestockmarkethasneverfailedtorecoverfollowingthedownturns.Instead, greedalsomakesyougoafterthehottesttrends,whichcanbetoolate.Doyourememberthe memestockscraze?Anotherthingisthatwhenthepeakhits,alotofpeoplehopinandlosealot. • Investingwithemotionsisequatedtodrivinginastorm.Onceyoupanicandhitthebrakes,youlose control.Andyetwhenyoucankeepstill,whenyoucankeepon,andwhenyouhaveconfidencein yourcar(orinyourlong-terminvestmentprogram,asthecasemaybe)youwillmatchsafely. • Tipsonhowtostaycoolwhenthemarketsswing • Howthendoyoustaycoolwhenthemarketdoesnotgiveyoustraightballs?Someoftheage-old tacticsareasfollows: • Haveaplan:Understandthereasonswhyyouhavepurchasedastockandthecircumstancesyou wouldsellit. • Autostoplossorders:Automateyourprotectiononthedownsidebynotlettingyouhaveto makereal-timetimeemotion-baseddecision-making. • EnsureyoudosobylookingattheLongTerm:Zoomout.Itmakesnodifferencewhetheryou takeadiptodayornotwhenyouwanttoreachagoalin10years. • DoNotConstantlyCheck:Youshouldavoidconstantmonitoringofyourportfoliowhichwill createanxiety.Checkinonceaweekoronceamonthinstead. • PracticeDollar-CostAveraging(DCA),investanamountregularly.Thislevelstheeffectsof volatilityinthelongrun. • Panicandexcitementdonotrewardthemarket,butpatienceanddiscipline.Learntobeaninvestor, notagambler. • 7.UnderstandtheImportanceofDiversification • TheReasonsWhyYouShouldNotPutYourEggsinOneBasket • Whenitcomestoinvesting,thereisonlyonegoldenrule,whichisdiversification.Thisimpliesan investmentdiversificationtoreduceriskbyinvestinginvariousassets,sectors,andlocations.Youcanthinkofinvestingallofyourmoneyinasingletechstock,andonedaythebusinessgoesunder. Yourwholevalueisimpaired.However,incasethatstockrepresentsonly10percentofyouroverall investments,thentheeffectswillbecontrollable.
Whenyoudiversify,youwillbesafeguardedagainsttheunfamiliar.Nobodycantellwhatstockor sectorwillboomnext.Sobydiversifying,i.e.,tech,healthcare,finance,international,andreal estate,youaddtheprobabilityofsteadyreturns. • IthasbeenobservedbyWarrenBuffettthatdiversificationisinsuranceagainststupidity.Itisnota matteroflayingawageronthewinninghorse,butithastodowiththefactthatweareinaraceof manyhorses. • SettingaPlanfortheDistributionofAssets • Inordertodiversifyitisagoodideatothinkofyourportfolioasapiechart.Itcanbecrudely outlinedasfollows: • 60percentStocks(progressiveindustriesandcapitalisations) • 20percentFixedIncomeorBonds(toprovidestability) • 10percentRealEstateorREITs(growthandincome) • Short-terminvestmentsordeposits10%incashorshort-terminvestments(for opportunitiesandemergencies) • Youcanalterthisbalanceasyourfinancialobjectivesortolerancetoriskchange.Whenyouare young,youmayinclinethescaleinfavourofstocks.Nearingretirement?Bondflightandflightto saferassets. • InvestalsoinETFsandindexfunds,whichprovideimmediatediversificationamonghundredsof firms.Theyarecheap,effective,andsuitabletonewlearners. • Theideaofdiversificationdoesnotalwaysmeanthatyouwillmakeprofits,butitreduces exponentiallyyourchancesofatotalloss.Whataboutthatpeaceofmind?Priceless. • Conclusion:SmartInvestingStartswithSmartPlanning • Thestockmarketisnolotteryticket;itisalong-term,sustainedprocessthatmakespeoplegenerate wealth.Whenyoudoitblindly,itisgambling.However,whenyouinformyourself,haveaconceptofgoals,knowhowmuchriskyouarewillingtoaccept,andhaveanintelligent,diversifiedapproach, thepay-offscanbelife-altering. • Allseventhingswehavediscussedarelikebuildingblocks.Theygohandinhandandpresenta soundbasetowardsultimatefinancialprosperity.Andnote,thereisnothingwrongwithbeginning withsmallsteps.Thetrickishowtogetstartedsmartly. • Neverhunthype.Donotfreakoutwhenthingsaredown.Havefaithintheprocessaswellas keepingatit,andtimeworkingitsmagic.Thefutureyouwillbegrateful. • Contactusformoredetails:https://profitmaxacademy.com/
