If you are a new investor looking out for investment opportunities, the stock market is indeed a very good place to start. The stock market offers new investors an opportunity to invest in thousands of companies, and numerous ways to profit from their investments. Newcomers are attracted to the stock market because it offers good returns.
However, before you start investing in the stock market, you should be aware that if your fundamentals are strong the chances of your going wrong would be minimised. You must have heard of heard of frenzied buying and selling that defies rationality and is driven by emotion and sentiment. Here are some basics that should serve as a primer and help you keep a level head while investing in a stock market.
Focus on fundamentals
While investing in stocks and shares, one of the first things you need to ensure is that you are trading or investing on a tech-savvy platform that offers you the advanced stock trading tools and round-the-clock service. These factors are highly important in the age of the internet. You should know that the days of placing a stock buy or sell order by calling a broker are long gone. This is the age of apps and algorithms. The new generation of young tech-savvy investors believes in speed and efficiency. Thus, a platform that allows them to make fundamental and technical analysis, offers a market screener and continuous in-depth news and analysis, and provides access to markets across devices and geographies is key.
The next important factor is deciding whether you want to trade or invest. This means you have to make a choice between speculating on short-term price movements, benefiting from arbitrage, or investing with a long-term view. Day traders try to make a profit from the price movement of a stock and use technical analytical tools such as candlestick patterns and stochastics to predict if a stock will open gap-up or gap-down, how it will trade in morning trades, and what previous high or low level it will breach. Long-term investment, on the other hand, entails focusing on the stock from a long-term perspective. You remain invested in a stock because you are convinced about its fundamentals. Being invested for the long term means that you will hold the stock over a longer period and benefit from the growth of a company. You will perform an analysis of the company in which you are investing by looking at its quarterly earnings reports, its annual report, and updates on important stock-impacting events such as the launch of an innovative product or technology or a new market launch.
The history of the stock market shows that investors who have invested over the long term have earned handsome returns. According to a CNBC report, a $1000 investment in Apple in August 2008 earned $9,222.50 in August 2018, a return of more than 9x, excluding dividend. However, the big caveat here is that this cannot become a formula for investment because past returns are not an indicator of future performance.
If you are confident of tracking the market minute by minute through the day, you can dabble in trading. If not, do your analysis well and decide whether you are going to adopt a top-down or bottom-up approach. In case of a top-down approach, identify the sectors that are performing well and invest in stocks in that sector. For instance, you may choose a defensive industry such as pharma and pick the winners from that sector.
If you are a bottom-up investor, you would invest time and money is “stock picks” or selected shares that are likely to give good returns under specific circumstances. For instance, a merger or a takeover could suddenly arouse interest in a particular company because synergies with the merged company are good for the bottom line and EPS. The quest for spotting the next Apple is a never-ending process – and to many, what makes investing in the stock market an exciting activity.
