Investing in the stock market is still one of the best ways to reach financial freedom and stay ahead of inflation. Due to the recent ups and downs in the economy, some have wondered if stocks are still a viable investment option. The answer to that question is “Yes!” and the more educated you are on the subject, the less likely you will be to make unwise decisions.
For those who have yet to fully understand stock investing, the amount of information available on the subject may seem overwhelming. Educate yourself in small chunks. Dedicate 30 to 45 minutes each day to learning the basics such as stock market terms, reports and a plan to develop your financial goals. The sooner you are able to map out your strategy, the closer you will be to reaching financial freedom with the help of solid stock investments.
How are stocks valued?
A stock’s price is determined by how many people want to buy it versus how many want to sell. In general, the more people who want to purchase a stock, the higher its price will be. Market trends also may be driven by world events, industry changes or even rumors that can spark fear or greed. This can be the most exciting and at the same time possibly riskiest aspect of stock investment.
Investors also look at the ratio of a stock’s price to the company’s earnings (P/E). The lower the P/E ratio, the better value a stock may be, analysts say.
Why is the stock market so unpredictable at times?
On a long-term scale, the market follows measurable patterns of financial, economic and global growth. It often becomes unbalanced or out-of-whack due to the human or emotional element. Periods of prosperity may cause stock prices to rise more quickly than underlying earnings would seem to justify, while economic uncertainty may cause the market to drop beyond normal predictions. Understanding the reasons for these unpredictable fluctuations will take much of the worry out of your first steps into investing.
With that in mind, here are some stock investment basics:
- Open an account with an online stock broker. They usually will offer helpful stock-trading courses.
- Start with a modest investment amount and purchase both stocks that have a positive long-term outlook along with those you think might do well in the shorter term.
- Diversify your portfolio. This basic strategy can be accomplished by investing in different companies as well as different groups of industries. The object is to always have gains that offset any losses.
- Don’t try to time or predict the market. Regardless of all the books you may have read, a foolproof way to determine market trends has never been found.
- Plan to hold stocks for at least one year to qualify for the long-term capital-gains tax rate.
- Set up a dollar-cost averaging stock-purchase plan that will keep you investing on a scheduled basis. This will ensure that you are putting the same amount of money into new investments each month.
Remember, you can never know too much about stock trading. Continue to educate yourself as you employ the ‘slow and steady wins the race’ technique to investing, instead of taking unnecessary risks that have been the downfall of many.
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Tags: dollar-cost averaging, fundamentals, P/E ratio, STOCK MARKET