Investment in stocks can be very rewarding. Investment in stocks can build a nest egg for retirement or the money to start up a new business. Stock market investment starts with learning the basics of stock investing. What are stocks? What are bonds? What are mutual funds?
Stock picking means finding stock worth investing in. There are growth stocks that may double or triple in value in a short time and there are very stable, “stalwarts,” with a hundred years of quarterly dividend payments and steady, if slow, growth. Learning to invest includes recognizing the investment risk of growth stocks and the pros and cons of investing in dividend stocks.
It is important to learn trading terminology to capitalize on short term market moves even if the investor’s goal is primarily long term capital appreciation and security of investments. Understanding stock market trends is important but the most important factor in investment in stocks is to understand the fundamentals of the company in which stock shares represent partial ownership.
Investment in stocks gives the investor partial ownership and a vote in the company’s affairs but not a voice in direct management. Shareholders can vote their shares at the company’s annual meeting. Annual meetings are held to elect or reelect the company’s board of directors and to vote on issues important to the company. Shareholders rarely go to annual meetings. Rather, the company mails each shareholder a proxy ballot on which the shareholder votes his or her preferences. What to do with retained earnings might be one issue for a company. There may be a fight over control and direction of the company.
Reading company reports and understanding the company’s price to earnings ratio, cash flow ratios, viability of its product line, and knowing its competitors are all basic to investment in stocks. Market moves are important but, over the long term, it is the viability of the underlying business that determines the price of the stock. A strong company has competent management, good research and development as it applies to their products, and, hopefully, no dominant competitors.
Successful investment in stocks is often based upon value investing. This time honored concept teaches to invest in companies with strong fundaments and low stock prices. This often means looking for companies with low price to earnings ratios, good management, and strong product lines that the market has overlooked. Often the day to day psychology of investing becomes a herd mentality. Standing apart from the herd, doing independent market analysis, and buying the strong company that has been bypassed, makes for successful investing.
Market timing is something that the investor learns with experience. It requires a competent knowledge of the stocks and market sectors in question, attention to detail, and confidence born of study and experience. Long term investing in good stocks avoids repeatedly paying commissions. However, the stock market does fluctuate and the investor can only buy low and sell high if he or she is attentive to the fundamentals of a given company and to pertinent stock market news. In fact, only the investor that does his or her homework may understand how the news of the day will affect their stock price in the days to come. Investment in stocks is all about homework.
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