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Starters Guide to the Stock Markets

With the implosion of the global financial and credit markets, leading to the worst conditions in at least 70 years, it might be important to have a better understanding of the stock market and it works.

First, why is it called a market? Well, a market is a place where goods are bought and sold. The stock market is where people buy and sell stocks, or shares of ownership in a company. Potential investors can choose from many companies that are listed on the stock exchange (or market). When people buy and sell stock, it’s called trading.

Who Am I If I Own Stock?

When a person buys stock in a company, that person becomes a shareholder in that company. (Stockholder is another name for a shareholder.) A shareholder is also called an investor in the company. When that company makes money, the value of the company’s stock often increases. Then more people become interested in investing in the company. Sometimes, shareholders receive a dividend, which is part of the company’s earned income in the form of a cash payment.

Some people try to make money by buying and selling stocks. Stock prices move up and down. Sometimes very dramatic changes in prices occur and as we have seen with the crash of the markets in October of 2008 prices can fall very sharply. When that happens, shareholders lose money by selling stocks that they own. A company’s stock price may be affected by market or economic conditions or in the case of a market crash, just irrational fears.

When people invest in a company’s stock it has an effect on the stock’s price. As more people want to buy shares, the stock’s price usually goes up because more people want to own it. On the other hand, if more people want to sell their shares and there is less demand for them, then the price of the stock goes down.

Just like an individual, a mutual fund can also buy or sell shares of a company’s stock. A mutual fund is a group of stocks and/or bonds that is owned by a group of people. The advantage of a mutual fund is professional managers select stocks to buy and when to sell. The people who invest in mutual funds are also known as shareholders because a unit of ownership in a mutual fund is called a share. A mutual fund uses the cash invested by its shareholders to purchase stocks, or in some case, bonds. Since a mutual fund may contain the stocks of many companies in its portfolio, shareholders are often able to own a greater and more diverse number of stocks than if they invested directly in the stock market.

Two Common Measures of Market Performance

Stock market averages are quoted in the media because they provide clues about overall movements in stock prices and whether most investors are trying to sell or buy shares. The most often-quoted market average is the Dow Jones Industrial Average. The prices of a specially selected group of 30 industrial stocks (some of the largest companies in the United States) are averaged each day to determine the Dow Jones Industrial Average.

The Standard & Poor’s 500 Index (S&P 500) t 500 different stocks. It’s an index composed of the stocks of 500 US companies. Created by the Standard and Poor’s Corporation in 1923, today the S&P 500 follows a number of sectors, including financials, information technology, health care and many others.

A big difference between the Dow and the S&P 500 is how their values are calculated. While the Dow only looks at stock prices, the S&P 500 looks at the total market value of each stock in the index. A stock’s total market value is found by multiplying its share price by the number of outstanding shares. To find the S&P 500′s current value, a computer figures out the total market value of all 500 stocks in the index, adds them together and divides that sum by a number called the “index divisor.”

A lot of investors prefer to use the S&P 500 as a market indicator because it looks at total market value and includes more stocks from different industries than the Dow. Many mutual fund portfolio managers compare their fund’s performance with this index.

That’s why many people think this index gives a clearer picture of the stock market than other stock market averages or indices. Since the S&P 500 includes so many companies and industries, it’s known as a broad-based index. Although a mutual fund may compare its performance to the S&P 500 or another broad-based index, this does not mean the fund’s portfolio has the same stocks that are tracked in the index.

WHAT IS NASDAQ?

Nasdaq is short for National Association of Securities Dealers Automated Quotation system. This computerized trading system was launched in 1971 and has become very popular as the market for smaller companies. Stocks traded over-the-counter, rather than on a traditional stock exchange, are reported here. The Nasdaq Stock Market now accounts for over half of the volume of all stocks traded every day, and the Nasdaq Composite currently tracks the prices of more than 3,000 stocks.

As with the S&P 500, the market values of the companies within the index are used to calculate the value of the Nasdaq Composite. But because it contains so many smaller companies, this index offers a look at a different section of the market than the Dow or the S&P 500. Investors use the composite to get an idea of what’s going on with young, and possibly fast-growing, companies.

Which Index is Best?

No one market indicator is best for everything. There are more than 100 indices and averages for watching different parts of the market. But if you use the Dow, S&P 500 and Nasdaq Composite together, you should get a good idea of what’s happening in the entire stock market.

All kinds of people invest in the stock market for all sorts of reasons. Some people are active traders, taking positions in stocks for a day or two looking for quick changes in the price of stocks, and then selling on any upward movement in price. This is known as day trading. Other people invest in stocks for the long-term potential for growth and the gains from the payments of dividends. Others have their accounts professionally managed by a stockbroker, who will often be authorized to buy and sell in the name of the account holder.

As we enter into 2009, most forecasters are calling for a sharper recession and predicting that both the credit markets and stock markets will take several months to recover. The smart money is looking around at the prices of stocks and carefully picking from the sharp declines to buy companies at way under real value. The risk for most investors, is as the economic continues to decline, even good companies that are under valued may fail.

Stock prices as low as this have not been seen for a very long time. If you plan to invest now, be there for the long haul and expect more sharp variances in prices before we see stability return to stock investing.

How Long Before I Can Be Profitable In Trading In The Stock Market

I read about this topic so much on other blogs comment sections. It’s kind of sad and exciting all the same. There are a lot of people out there wishing to make it as a full time stock trader. You can do it but most won’t make it and here’s why. Most people will get burned one too many times and will throw in the towel. I don’t know if we can prove the statistic but many experts say that most people quit about one percent short of achieving their goal. If they would have just swung the bat one more time, knocked on one more door, made one more phone call…whatever the case is, they would have realized enough success to keep their spirits up for many more rejections. Finally, they would have been a success story.

“You give 100 percent in the first half of the game, and if that isn’t enough, in the second half you give what’s left.” — Yogi Berra

You must first believe! I believe this is the biggest ingredient to any success. Believe with all your heart that your goal will come to pass no matter what the obstacles and it will. And there will be obstacles. If you trade the stock market just look at your charts over the last few days. My favorite mentor in the world Zig Ziglars says “They don’t make smooth mountains”. If you’re going to climb, you must go over the rough surfaces some how. This is all good news because in the end you will make it and you’ll know you earned it. If it were easy the reward be not be as great.

“Life is like mountain climbing. You can be dropped off on top by a helicopter or you can climb your way up. While the view is the same, it’s much more beautiful to the person who climbed” Kenny Rogers

Make a decision to succeed. Stick to it. When you get weak, as we all do, seek resources to fuel your inner fire. Read a book, read positive articles on line, call a mentor, do anything but do not quit.

Two great books to get you started:

1. See You at The Top – Zig Ziglar

2. Goals – Brian Tracy

I have made a huge habit of listening to positive audio CD’s in my vehicle where ever I go. This has been a huge help.

My greatest motivators:

1. God (prayer). I write my goals down every day and I pray daily and nightly to God the He will guide me in the right direction so that I reach my goals perfectly on time.

2. My family. I am eager to succeed to provide a better lifestyle for my family. My soon to be wife gives me such great support and encouragement. This is vital in any success formula.

3. Positive input. This could be books, blogs, articles, audios…anything to give me more knowledge or add a little pep to my step. Note: It is equally important to ensure we keep out negative input. Nothing can bring you down faster than people who want to rain on your parade.

4. Nature. There is nothing more soothing to me than a nice time spent out in this beautiful world. I love all of it. Rain, sunshine, water falls, beaches, birds…I even get excited about hurricanes as long as no one gets hurt. Spend some time each week winding down in the presence of nature.

Have you noticed that this is all very little about trading? See, if we first get the person right, the goals begin to magically fall into place. If you will agree to never risk more than 2% of your account on any one trade (this means you’ll have to be wrong 50 times in a row to wipe out your account) and focus on getting yourself right first…you’ll win this game. You control your time frame on becoming a profitable trader.

If there is anyone who would like more help with this area of their life please feel free to comment and we’ll spend more time here. There are very few things greater in life than to make a positive impact in the life of another.

Now go dream big!

What You Need to Beat the Stock Market

Year 2009 is over now and with this we have entered a new decade. We all know that the world is still under the influence of the worst economic meltdown. After touching the lows in March 2009, stock markets have rebounded with the economic recovery. And, till now stock markets have surged 59 percent. But have you made any plans for your stock investment for year 2010? If no, then you must do something because with the economic recovery, stock markets will also grow and to cash the benefits from bullish markets, you definitely need a strong strategy and appropriate planning.

Before you begin with anything, it is very important to ask a few questions from yourself. Is your stock performing well on the index? Do you wish to continue with this stock in this New Year? If your answers are “yes” then certainly your plans are strategies are well formulated and implemented. Continuing with your present financial security will pay you greater returns. But if your answer is “no” then definitely there is some problem. Either your strategies are not working the way you desired or there is something wrong with the stock itself.

You need to formulate your investment strategy now. Even if your instinct is saying something, you need to look deeper and research well to harness the profits from your investment. So, for year 2010, what you need to beat the stock market? The answer is very simple, you only need a few guiding principles to beat the stock market in this year.

Principle no. 1 – value investing is the key you need to unlock big profits – value investing cannot be defined in words since it exists only in psychology. So, how can you attain, value investing methodology? Well, investing is not a cup of tea, it is a serious business and therefore you need to carry that professional “attitude” with you. “Ego” is something which has been cursed time and again and is entitled as “biggest enemy of stock traders or investors”, so leave it aside. It is very crucial for you to accept if you are losing in stock market. Therefore, evaluate and analyze your own performance to S&P 500 index. Tracking your performance will help you analyze if you are at problem and the reasons for the same. If you want to invest for value then perseverance is the right guide for you. Whenever you calculate and form your trading plan then simply stick to it. Most traders sell off their securities even at small negative news. Don’t even listen to your instinct in such situation or to what other people say. It is your business, your investments are at stake and therefore you must do it all alone. Performance is delivered when you hold your stocks. If you don’t have “guts” to hold your security just because of negative news or bearish market then remember your investment performance will not be impressive. Long term is the buzz that you need.

Principle no. 2 – Right method – what you need to be a winner is the right method of trading. Value investing is only possible when you have that right method. So, where is this right method? Well the wrong method complements small term investment mostly. Now you can understand where you can find that right method. Yes! Long term investment is the right way for value investing. Most investors want to invest for long to achieve the results they want. Contrary to this, most traders believe in trading for small term to stay in market and play the game, again and again. You need to decide what you want to be, a trader or an investor. The fact cannot be denied that market has a belief that risk means more rewards. Investors chase those risky investments but again they are meant for short-terms i.e. appropriate for traders not for investors. Performance comes out when you invest while maintaining mental calm which is not possible in case of traders.

Principle no. 3 – Right tools – if you have made up your mind to achieve big from your investment, certainly everyone want to do that, but only few can attain that since they use the right tools to pick those “star performers”. Thanks to internet for making right tools available to everyone. Data mining software programs can really help you pick valuable stocks. Accessing websites that provide company information, stock news, tips, press releases and other tools, is a great just like picking great stocks. Some “just right” tools that you can rely upon are given below-

Valuation screening tool – screening tools are very useful for screening against value metrics for you. A lot of websites provide screening tools for paid and even free access. Yahoo screening tool for stocks is one such tool appreciated widely and is available for free.

Insider buying tool – crucial tool that can help you with latest updates on insider buying stocks. If you have insider buying or selling stock information then defiantly you can follow the foot steps of those wise insiders.

Including the principles stated above in your investing career can be really fruitful. Even if you are not able to practice these guides then at least try to do investing business seriously and sensibly. Your instinct, news, views of your friends, family or stock market geniuses can take your success away from you. Therefore, stop listening to what others have to say, research yourself and believe on actual facts and data and always use the “right tools” available.