Understanding The Stock Market 1 - Stock Investment Tips

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Understanding The Stock Market - Where Should You Start?

January 2009 - There is no easy way to say it, learning about and understanding the stock market is not something that is likely to be taught or learnt in a few days or weeks. There are so many nuances and techniques that are possible that it could - and probably should - take some time (several years) to really get a deep and lasting understanding.

For lots of people, they may actually be better off NOT understanding the stock market too well. Unless a person really has the time to devote to it, can they really compete with the professionals? Even if a person does have the time and energy to spare to concentrate on investment, should they even try and beat the pros?

Many people would be far better served by focusing more on asset allocation and sound financial management principles. This is a much better strategy than gambling money away on a low priced ‘sure thing’ stock that is high risk and not fully understood.

Many first time investors think that they should invest all of their savings. This isn’t necessarily true. To determine how much money you should invest, you must first determine how much you actually can afford to invest, and what your financial goals are.

First, let’s take a look at how much money you can currently afford to invest. Do you have savings that you can use? If so, great! However, you don’t want to cut yourself short when you tie your money up in an investment. What were your savings originally for? In investment terms, this issue is called ‘liquidity’ - a fancy way for describing the ease with which you can re-access your money.

It is important to keep three to six months of living expenses in a readily accessible savings account – don’t invest that money! Don’t invest any money that you may need to lay your hands on in a hurry in the future. In financial management speak, this is called an ‘emergency fund’ and should be kept on deposit in a bank account somewhere for easy access.

Until this is done, you probably should not be thinking about investing and almost certainly not thinking about investing in the stock market. Be sure to get the basics of family or household finances right first.

Personal experience suggests that most people do not have an adequate emergency fund set aside. If you are in this position, and need to start saving before you can start saving, you have some time to start learning about business, investment, finance, economics and the stock market. Yes, that is quite a broad range of topics to be starting with. However, the more advanced investors - and traders - will also be working hard to understand portfolio theory, accountancy, taxation, statistical analysis techniques, advanced number theory, geo-politics and more.

This is why investment is such is thoroughly absorbing way to spend time. It is a pursuit in which perfect skills, technique and knowledge are never possible. As such, there is constant learning and thinking to be done. Even better, much of this constant learning and thinking needs to be about important subjects.

A keen investor must ask questions and peer behind the news stories to uncover the truth. He or she needs to be able to decipher political rhetoric, macroeconomic trends and still be able to focus on finding companies that are winners. This can be a fascinating lifetime pursuit!

For many investors, it can literally take them years to decide which investment ‘style’ is the most suitable for their personality. Are they traders? Could they be bulls or bears ? Do they trust in growth or value? These can only ever be personal choices taken by an individual - no fund manager, investment consultant or financial planner can assist with it.

Any beginners guide to the stock market , therefore, must focus on finding a way to ease readers into the belief that stock investment and understanding the stock market is a fascinating endeavour, but is also one that needs both time and patience. I wish you luck.