8 Tips on How to Understand the Stock Market
There’s so much jargon out there these days that sometimes it can be confusing for the novice to understand stock market terminologies and functions. So how to understand the stock market then and make sense of it all?
The first thing you need to do is get with the lingo. You can look up sites such as Investopedia or Investor Words for definitions that you some across while reading the financial section of the paper. Common terms you should know are “market capitalization”, often simply called “market cap”, P/E ratio, earnings per share, dividends, book value, stock price, and yield.
Once you understand the language, you can move to analyzing a company’s financial reports: read balance sheets, annual shareholder reports, profit and loss statements, cash flow statements and familiarize yourself with these accounting concepts. Read about their long-term plans, directions for growth, which sectors they want to grow and invest in, product developments, brand loyalty, market goodwill, and more.
Next, you need to do some basic economic research. What’s a bull market, what’s a bear market, recession, depression, economic downturn, market analysis, etc – familiarize yourself with these economic terms.
A crucial part of how to understand the stock market is to understand government reports, outlooks and analysis. You should read reports put forth by the Securities and Trade Commission, be aware of the activities of the Federal Reserve and any rising or falling interest rates, and be generally aware of any government legislation that will directly or indirectly impact your stock portfolio (e.g. if you want to hold stock in healthcare and biotechnology companies, you’ll obviously pay close attention to the health care initiatives of the government).
The next step is to conduct online research. Log in to the numerous financial websites such as Yahoo Finance and start researching. Look at stock movements, look at stock tables, read analytical reports and familiarize yourself with the working of the stock market. You can even set up your own online trading account for practice on stock investing.
Learn the functions of brokers, brokerage firms and specialists on the trading floor. Learn how each contributes, along with the buyer and seller, to determining the stock price for any given day. Do a little research on the services offered by full service brokerage firms and by discount brokerage firms and understand the differences in services and commissions. While full service brokers may offer value in terms of stock management and advice, discount firms will get you a trading account and let you learn and manage on your own, so choose a style you’re comfortable with.
Read books, magazines and investor advice on how to understand the stock market. Play simulation stock market games by not investing real money but practice in the virtual world until you get the hang of it.
Learn how to invest for income or growth and not for speculation, which might be risky for a beginner and could burn you right at the start, thus making you afraid to delve deeper into stock market investing.
Learning how to understand the stock market is a crucial first step before you can begin actual investing practices. Follow the strategies outlined here to make sure you’ve covered all the bases in your research. This way you will start stock investing more confidently.
This is default description text on Padangan Themes, of course you can change this text via you profile administration.
@equilshift Just thought I might let you know that even the greatest minds that ever lived have struggled over this, and will continue to struggle over it for generations to come. (Indeed, eliminating the randomness “inherent” in our understanding of quantum mechanics was Einstein’s white whale, he spent most of his academic career fruitlessly striving to eliminate the need for chance in our description of the universe.)
@equilshift he never said that explicitly. Anyway, there is another (much larger) group that believe in the concept of randomness, and that certain things in this universe just absolutely cannot be predicted. Our best understanding of quantum mechanics at this point includes an element of randomness. Anyway, it might be philosophical for we scientists, but it is less academic and more practical for economists and social scientists such as yourself who try to describe the universe through numbers
@equilshift (i.e. the location, direction of travel and mass of every particle in the universe) that the future could accurately be predicted, and that, in fact, one could sort of “see into the future” using numbers. Of course this is totally philosophical, since any computer doing that would have to somehow calculate its own effect on the future, as well as the impossibility for fulfilling the requirements of “enough information.” Einstein might have been considered to be in this camp, although
@IndexFundsAdvisors This video has always fascinated me, and reading through the recent comments I just wanted to say that people are probably just pretty angry about the current financial system in the US, I wouldn’t take it too hard.
And this video always gets me in a philosophical mood. There is a (small) group of physicist which are sort of loosely referred to as determinists, who believe that, given enough information about the universe
how do you get the balls out
IFA provides: 1. Emotions Management 2. Fiduciary Duty 3. Ongoing Advice 4. Client Services 5. Rebalancing 6. Tax Loss Harvesting 7. Performance Reports 8. Glide Path 9. Continuing Education 10.Tax Management 11. Chart and Data Updates 12. Cash Withdrawal and Deposit Management 13. Wealth Management 14. Alternative Investment Evaluations & other services and advice as needed. As seen in this video, market returns are random, but our services and compliance requirements must go on.
@sfsTrader – IFA is an independent RIA and we do not own funds. We provide fee only fiduciary advice to clients. We advise clients to invest in 1 of 100 index portfolios depending on their risk capacity. The Index Portfolio #100 you are referring to dropped 40.55% in 2008, but it was up 8.28% annualize over the 11 yrs, 1 mo period from Jan 2000 to Jan 2010. The simulated return for 83 years is 11.23% annualized with std dev 23%. You can see this at ifacalc dot com. Please read ifabt dot com.
with a little analyzing, anyone can look back in hindsight and come up with a strategy that “would have produced great returns”. your fund has been around for 10 years and in the 8th year, 2008, you lost about 41% off your high, erasing most of your first 8 years worth of gains. then you got back to your high within 2 years. sounds a little volitile to me. that steady growth shown in your back tested charts seems to have ended when you guys opened shop.
can you explain this volatility?
@sfsTrader Fyi, its is far more complex. There’s aggregational “quasi-Gaussianity”(tail heaviness decays as aggregate over increasing time scales), multi-scale intermittency (multi-time scale irregularities), volatility clustering, nonlinear dependency (nil return auto-correlation whilst absolute and square returns auto-correlation exhibit a slow decay) etc. Holding a longer term sufficiently diversified portfolio (except in the unusual case of an infinite first moment) is beneficial.
@IndexFundsAdvisors you earn a “fee” on client’s assets….thats kind of performance oriented. are you not confident enough to earn a fee on percentage of gains?
@sfsTrader – You asked if we work on commissions. No, we do not. We are a fee only registered investment advisor with a fiduciary duty to our clients. We are paid a fee that is based on a percentage of clients assets.
@IndexFundsAdvisors Of course fat tails matter for passive investors, surprises matter in the markets. You make all your money on commisions, dont you?
@sfsTrader . Of course there are fat tails, but for passive investors it does not matter. Also, in the last 50 years you do not see fat tails in risk-appropriate holding periods. For example, Index Portfolio 100 held for 15 year periods does not show fat tails. See discuss and links in the video description above. mark
cool. i would like to make machines that have lights and parts that shake or shoot out steam like in old cartoons/movies.
FYI in reality stock markets have a bell curve with fat tails
Coetmor, This may help you in your understanding of randomness in the context of statistics and finance. See Wikipedia’s page on randomness: In probability and statistics, a random process is a repeating process whose outcomes follow no describable deterministic pattern, but follow a probability distribution, such that the relative probability of the occurrence of each outcome can be approximated or calculated.