A growing number of people are concerned with the U.S. stock market, especially after the Dow Jones fell more than 8 percent in late August. It was alarming to see the index tumble thousands of points in a matter of days; but it does not mean that investing in stocks is a bad idea. The era in which the U.S. stock market is driven by unemployment statistics and interest rates has ended. Today’s market is linked to global issues such as China’s economic slow down and European banking news. Today, more than ever, it is important for people to understand how to invest wisely in the stock market — even if you’ve just entered the workforce or don’t have a lot of money to invest. Here are answers to some common questions to help you get off to a good start.
Before I begin to invest, what are the terms and concepts I need to understand?
Everyone talks about stocks, but exactly what are they? Stocks represent a partial share of ownership in a company. Owners of stock are called shareholders. All of the shareholders together make up the total ownership of a company. Stock exchanges, such as the NASDAQ or the New York Stock Exchange (NYSE), are electronic marketplaces where individual traders can buy and sell stocks with other traders.
I don’t have a lot of money to invest. How can I get started?
No matter how much money you have to devote initially, it is easy to get started investing in the stock market. The first step in becoming a smart investor is to read about the markets, specific companies and information from analysts who follow the market every day. Websites like Yahoo Finance and CNBC, along with publications such as the Wall Street Journal and Barron’s, are good places to start. The knowledge you glean from a little bit of research can serve as a small yet important stepping-stone into the investing arena.
The second step to becoming a smart investor is to develop a strategy to analyze and select stocks. Some investors buy stocks because they like the product or service the company offers (think Apple or Starbucks). Other investors, including many novices, look at stocks through technical and fundamental analyses. Technical analysis relies on analyzing market data such as price movement, volume levels or momentum, and then making investment decisions based purely on these numbers. Fundamental analysis often involves looking at variables such as balance sheets, price-to-earnings ratios and company ownership. This fundamental school of thought is a more long-term strategy, and decisions are made based on analysts looking into the growth perspective of a company.
Now that you’re armed with a little more knowledge about the stock market and how it functions, it is time to learn about some pitfalls new investors should avoid. Steer clear of these common myths:
Myth #1: “The stock market is only for wealthy people.” This statement is false because, in fact, it does not take an enormous amount of money to start investing in the market. Any amount ranging from a few hundred to a few thousand dollars is usually a great start. Most brokerage firms require a $500 minimum deposit, yet some allow investors to sign up with even less in an account.
Myth #2: “You only get high returns from high-risk investments.” It is a common misconception that in order to make substantial returns, an investor must take substantial risks. However, investing in a portfolio of similar companies, otherwise known as an index, provides low-risk investments that instantly can diversify a portfolio and result in positive returns. Investing in an index fund essentially is spreading your money out over multiple companies that are very similar. For example, popular indices to invest in are oil, emerging markets and small cap companies. If you believe oil is going up, invest in an oil index and follow the entire sector. This low-risk, low-maintenance approach to investing is perfect for beginning traders.
Myth #3: “Stocks that go up must come down.” Stocks that go up do not always have to come down. For example, in 2010, a popular stock began trading at $30 per share, and then rose to $50 per share within a few months. According to Myth #3, this stock indeed would come back down again, right? Wrong! This particular stock happened to be Amazon, and over the next five years, its stock price increased more than 1,000 percent, and currently it is trading close to $600 per share. A good rule of thumb: Invest in good companies with strong financials.
The stock market does not have to be a daunting place that causes anxiety. Even now, with stock market volatility, millions of informed and smart investors are trading everyday. Getting involved in the stock market is a great way to take control of your finances and invest in your future. It might even turn into a fun hobby!
Eli Engelman, a student at Tulane University, is the creator of iStockAlerts, a free financial stock application that helps everyday investors make trades at the touch of a button from their mobile devices, tablets or computers. It is available to download on the App Store, the Google Play Store or simply by going to iStockAlerts.com and logging on through the desktop portal. The app provides a series of “buy,” “sell,” and “hold” recommendations for stocks based on a proprietary algorithm of technical indicators. In addition to stock recommendations, iStockAlerts offers detailed market news feeds, brokerage account integration with eight leading firms, including E*Trade, TD Ameritrade and Fidelity, as well as a wide variety of both simple and progressive features to help out aspiring traders.
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