Top 8 Things You Need To Know When Investing In the Stock Market

Diving into the stock market can be quite overwhelming on a number of levels. In addition to deciding to invest, there is a question of what stock to invest in, how to invest, how much to invest and when to invest. All these are fundamental questions that need a concrete answer.



Besides the mentioned questions, it is important to be aware of the following when investing in stocks:

Stocks are not just tiny pieces of paper

When buying a share of stock, it is prudent to know that you are taking a part of ownership in a particular company. Collectively, all the shareholders (you included) own the company. Every share normally represents a claim on earnings and assets.

Different kinds of stocks exist

Since different types of stocks are available, it is prudent to divide the marker according to kinds of growth patterns, sector and company size. You can measure the size of a company through its market capitalization. Some of the different kinds of stocks investors normally talk about are technology vs. energy stocks, value vs. growth stocks or large cap vs. small cap stocks just to mention but a few.

Stock prices normally track earnings

Over a short period, news, rumors, fear, and enthusiasm normally dictate the behavior of a market. On the other hand, over a long period, a company’s earnings determine whether the company’s stock price will go sideways, down or up.

Trust stocks to get a return over the pace of inflation

Ever since the world War II ended, and through the numerous ups and downs, the average large stock still manages to close to 10% annually. This is well ahead of inflation, return of bonds, real estate and an array of other savings vehicles. Consequently, you can trust on stocks to help you save money for your long-term goals such as retirement.

Individual stocks do not make the market

An excellent stock can go up even when the stock market is falling. A stinker on the other hand can go down when the stock market is blooming. Therefore, it is wise to say that individuals stocks are never the market.

An impressive track record doesn’t guarantee a strong future performance

Of great importance to note is that stock prices normally base on the projections of future earnings. Certainly, a strong track record normally bodes well. However, even the best performing companies can slip at one point or another.

A stock’s price is not enough to tell the expensive nature of a stock

The value of a stock usually depends on its earnings. Because of this, a $100 stock can be inexpensive if a company’s earnings projections are high enough. A $3 stock on the other hand might be expensive if the earnings potential of a company is dim.

Investors normally compare stock prices to other parameters to assess value

How can you tell whether a stock is undervalued or overvalued? Well, the best way to do this is by comparing a stock’s price to its cash flow, earnings and revenue among other factors. Comparing a particular company’s performance expectations to the industry at large is a common strategy. Trading in the stock market can be quite rewarding. However, before you start your trades, it is prudent to be aware of a number of things. The above are just some of the important things prospective traders need to know.