Before investing in stocks, there are three important things you need to understand about the stock market.
First, stock prices of fundamentally sound companies generally rise in value over the long term, which means over a period of several years.
However, there will be fluctuations in prices as the shares are traded daily. Over that period, though, the price fluctuations will even out, meaning the dips will be cancelled out by the spikes in prices, with an upward trend emerging. Of course, there will be exceptions to this rule, such as companies that go bankrupt, mismanaged companies, and the like.
Second, stock prices may move irrationally especially in the short term.
There is a tendency for investors to react emotionally to news that may affect share prices. For instance, news about a terrorist attack or changes in interest rates may cause a sudden fluctuation in prices.
This is why there are days when just about everything on the ticker board is red. There are also developments that may just affect share prices of specific companies such as lower than expected profits reported on a given date. Eventually, after emotional trading dissipates, share prices will become more reflective of the value of the stock.
Third, no one really knows when a stock has reached its bottom and is about to reverse.
Analysts have a myriad of tools to estimate how a given stock will behave, and when a given stock price or the index will reverse.
However, these are just tools, much like the tools used by the weathermen to predict the weather, so make room for wrong calls on the part of analysts. Just the same, it is important to listen to what analysts have to say before making your buying or selling decision, as they are finance professionals with access to the information and tools that you need.
1. Take a long-term view.
This cannot be overemphasized. The stock market is not for those out to make quick money. It is also not for those who cannot take on some risk. Be ready to hold stocks for a period of 3 to 5 years. If you feel that you cannot take a long-term horizon, then try other investment funds which are better suited to your requirements.
2. Do your homework.
Before buying any stock, know more about the business behind it to understand its long-term growth prospects. You may also wish to look at its earnings performance, how frequently it gives stock or cash dividends, and analysts’ recommendations.
3. Be patient.
Stock investing is not for those with a short-term investment horizon, which is why patience is key. Don’t rush to sell off a stock if you feel it is not moving as fast as you’d like it to go—this is a move best left to professional traders who work more closely with the market and better understand the impact of fees on trading. Note that it can take up to a couple of years for a stock to reach its target price range.
4. Accumulate stocks steadily over a period of time.
To make the most of market fluctuations, invest in stocks steadily over a long period of time. This will allow you to buy during down parts of the cycle, thereby averaging down your buying costs.
5. Consider mutual and index funds.
If you do not have the knowledge or the patience to invest in stocks, purchase mutual or index funds instead. The professional fund managers will choose stocks and buy and sell them at the time they deem most appropriate to ensure that you realize the most value.
In sum, there is really no right or wrong time to buy stocks if you take a long-term view, which is the ideal time horizon for investors in equities. However, as with any buyer, you would certainly like to buy when prices are low or are declining so that you can average down your costs. If you have money to invest, and do not need this very soon, you may wish to consider adding to your portfolio during downturns.
source: www.abs-cbnnews.com
