It can be a very difficult task when choosing which financial market to trade. Many at times we just see people trading without any prior knowledge or skill about the market – which can be disastrous in the long run.
In this article, we will talk more about STOCKS. At least 60% of people reading this must have heard about the word “stocks” maybe from an online news paper or from websites such as Wall Street Journal, Bloomberg and other’s.
So let’s get started.
What are stocks?
Stocks simply means the certificate of a company ownership; let’s give a good example to illustrate this, if trader A buys 100 shares in a company that issued a 100 million share then, trader A owns one-millionth (1/1,000,000) of that company.
Trader A becomes a part owner of that business and if another person wants to own it, they will have to bid for Trader A’s share thus lifting the value of the stock higher.
When people like the prospects (performance) of a business they bid for its share thus pushing up the price if they don’t like it, they sell their shares in the company and thus depreciating the price.
“Warren Buffett, one of the most successful investors in America is fond of saying that when you buy a stock you become a partner of a manic-depressive fellow he calls Mr. Market. Each day Mr. Market runs up and offers either to buy you out of business or to sell you his shares. Most of the time you should ignore him because the man is psychotic but occasionally Mr. Market becomes so terribly depressed, that is when you should buy. At other times he becomes so manic that is when he offers an insane price for your share and that is when you should sell.”
What move the price of stocks?
Why it is the value and price of stocks in companies go up and down? What is the driving force behind in this market? Understand that most companies try to push up share prices because it makes it so easier for them to generate more capital. These capitals are used to settle debts, increase productivity and acquisition of new assets.
Another factor which moves the price of shares in the company is the Fundamentals, especially earning reports and company decisions drive up price in a long run.
Stocks of unprofitable companies may at some point attract traders. These traders might have this perception that the company might perform well at some point, so they keep buying any share available and holding on to their trade.
While stocks of new companies, might attract traders on the expectations of future earnings rather than on operating (actual) records. Stock of profitable, well-run companies may drift side-ways to a down-ward before scaling high, but they will keep souring high as longer as the annual report is good and attractive.
Note that the market reflects what the aggregate participants know, think or feel about the company. A declining price means large holders are selling and when the price go higher it shows the large players are buying.
The essential rule in any market is “don’t buy a stock that’s trending lower even if it looks too good to buy” if you like its fundamentals, use technical analysis to confirm that the trend is up and not playing trick on traders.
ALSO READ: How to Ride the News in Forex Trading
What stock should I trade?
There are more than 3,000 stocks in the United State, with even more abroad, I always suggest to newbie to buy shares in company that are so simple and transparent. Most at time, we see newbies who cannot confidently trade a single stock looking for scanning software, robots and indicators that will let them track hundreds of stocks. They spread themselves financially thin by jumping between stocks and losing money instead of learning how to trade a single or a handful of them (stocks) well.
In summary, choosing a winning or good performing stock or a simple stock to trade is a lot harder than listening and reading tips and opinion on the internet. A trader must develop a set of fundamental or technical search parameters and also have the discipline to follow his strategy and trading plan accurately.
For a most comprehensive knowledge I recommend you read “how to buy stock by Louis Engel” that’s the best introductory book for stock investors and traders. The author is dead but the publisher update the book every few years –be sure to get the latest edition.
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