How Stocks Work For Dummies

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How Stocks Work for Dummies

Thinking of investing in stocks to grow your money? Do you want to know the power of compounding? Here are some crib notes for a newbie or would-be stock market investors like you. Stock investing is exciting, but it might give you a bit of a fright as it is sometimes complex and sometimes easy, and sometimes comprehensible and sometimes confusing. But once you get the hang of it and keep focused, you’ll enjoy the rewards.

Okay, let’s get the ball rolling. So whether you want to invest in stocks or you have already started investing in stocks — Whoopee for you! You should keep at it. And if you want to make the most out of your money in stocks, it’s best to have thorough knowledge about stock investments and up your skills on how stock investments work. You need to acquaint yourself with the nuts and bolts and ins and outs of stock market investment in order to gain confidence and know-how to help you assess the market and look for ways to protect your hard-earned money. As they always say, do your homework and apply some due diligence before getting into something.

If you’re hell-bent on stock investing, hold on to the following pointers as you make decisions and take in your earnings. Remember to keep your eye on the ball.

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Table of Contents

First off, remind yourself that you are not just buying a stock. You are actually buying a company. The main reason you are investing in this company’s stock is that you want to take part in the company’s success as it makes money. To put it simply, invest in a company that makes a profit. If you buy stocks with a company that isn’t making money, that’s called “speculate” and not invest.

The closest way to call speculating is “financial gambling.” Speculators are not investing but making a calculated conjecture whether the stock price will rise or decrease. Speculating is normally in a short term time period. But some can bring it long term. It takes expertise and a great deal of risk to get into that.

Remember, you’re still taking baby steps. And yes, you are investing, not speculating. So keep your eye on the ball. Let’s move on. Generally, stocks should not be the total of all your assets. Don’t put all your eggs in one basket. In some instances, when there is a critical bear market, stocks make bad investments. A bear market is when the prices are falling and selling is encouraged. However, bear markets may offer opportunities to buy for companies that are profitable.

Talking about the stock price. The price of a stock is contingent on the company. The company is dependent on the territory, the surroundings including the economy in general, the political atmosphere, the industry, and the customer base. Your horse sense and rationality are crucial in picking out a good stock. Don’t underestimate your logic, sometimes it’s just as pivotal as the advice of an investment specialist.

How do you know if your horse sense and logic are reasonable? Ask yourself the following questions and make sure you have a ready and sensible answer to them. Question one, “Why am I investing in this specific stock?” Question two, “Why am I investing in stocks?”

It is critical to have a general idea regarding the possibilities and promises of a company. Learn to check the fundamentals of a company before buying stocks. Do a little bit of sleuthing on the companies you’re thinking of investing in. Give particular attention to the company’s major components — their financial statements including income statements and balance sheets.

Are the sales this year higher than last year? Are their earnings at least ten percent higher than the previous year? What about their equity? Needless to say, their equity must be higher than last year’s equity. But when it comes to debt, obviously it should be less than or somewhat equal to last year’s. And of course, the debt must be lower than the assets of the company.

If you’re iffy about the company’s prospects and there’s somehow a shadow of a doubt, employ the use of stop-loss orders. “A stop-loss order is an order placed with a broker to buy or sell a specific stock once the stock reaches a certain price.” Implementing the stop-loss order is beneficial to the investor. One major benefit is with a stop-loss order the investor does not need to keep an eye on the holdings every day.

Having said that, an unwritten rule in the stock market is — it is still important to continue monitoring your stocks and considering selling them if they are not increasing or if the economic environment is not good. This credo holds true whether to want to buy and hold for the long term or not.

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