Investing in the stock market can feel like a gamble, and no one likes to lose money. That's why it's vital to be as well-informed as possible about your options before you take the plunge. If you are someone who can't stand the thought of losing, then perhaps the stock market isn't for you. However, if your risk tolerance is relatively high and you are willing to learn, you might find investing to be a very rewarding practice.
There are different strategies you can employ to lessen your chances of experiencing losses. While they do have their fair share of intricacies, knowing even just the basics of them will help you get a good start on the stock market. To get us started, we must first define what the stock market actually is.
Note: This content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.
An overview of the stock market
In a gist, the stock market is a system through which the shares of public companies are issued, bought, and sold. Millions of investors who participate in the stock market have different perspectives on how to trade, and such is necessary for trades to be possible. After all, there must be some investors who are looking to sell and some who are looking to buy, or else trades would never happen. With that in mind, the stock market is an adversarial system, in which some investors will profit while others will experience losses.
Several factors will determine whether the prices of certain stocks will rise or fall. News reported by the media, politics, natural disasters, fluctuations in the performances of companies, and the behaviors of well-known investors can all influence stock market trends. Investors take all of these factors into account and eventually commit to a stance in terms of how they will decide to move forward. Bullish investors, for example, are likely to buy stocks that they predict will rise in price, whereas bearish investors are more likely to take advantage of stocks that they predict will lower in price.
Whether the market is bullish or bearish will determine the ratio of sellers to buyers. Generally speaking, if there are more sellers than buyers, the prices of stocks will typically fall, whereas if there are more buyers than sellers, the prices of stocks will typically rise.
The challenges of making predictions
While the stock market is not predictable, investors can still make informed decisions by looking at certain parameters. Three important ones to consider are stock valuation, the trigger event, and personal logic.
Stock valuation is the determination of the worth of a given stock, current or projected. When looking to buy or sell stocks, investors will typically compare the actual value of a stock to its fair value, which is a broad, estimated measure of the worth of a security or asset. Generally speaking, when the actual value is lower than the fair value, the stock is usually worth buying. Conversely, if the actual value is higher than the fair value, the stock would be considered overvalued and probably better to avoid. Because fair value is often calculated via different methods, investors may end up using different fair values for a specific stock to compare the actual value to, and that makes it tricky to figure out if a stock is overvalued or not.
Foreseeing changes in market trends is also important to consider when making trade decisions. Understanding which triggering events will cause a reversal in trend can help you reduce the chance of experiencing losses from poor or trading decisions.
Ultimately, every investor will have to come to a decision based on the data that he or she has obtained from research and analyzed. That said, it's not possible to have all of the facts in order to guarantee a win since there are just too many variables at play. This is where logic and emotions come in—even the most analytical investor will have to rely on personal reasoning and accept some risks.
When should you buy or sell?
Determining when you should buy and sell is a critical part of the investing process. But just like anything with the stock market, timing is not clear-cut when it comes to making trades—there aren't specific buying and selling periods that are assuredly advantageous.
Though, there are some general rules of thumb investors can try to follow. For example, in some cases, buying stocks when they are undervalued or if prices have fallen might be worth it if, based on well-informed predictions, those stocks will see an upward trend in the near future.
That said, patience is also key in those situations because an undervalued stock will take time (sometimes even years) to trade up to its true value. Of course, purchasing decisions based on projections always come with a risk, as such projections may not be as accurate as one may initially believe.