How to Understand the Stockmarket
- 1). Research and understand the basic definitions and types of stocks from dictionaries or business textbooks. Give special attention to common stocks, which are the basic units of ownership in a corporation and are the most commonly transacted in stock markets. Note that prices of stocks move up or down and values of transactions depend on numbers of shares bought at each price.
- 2). Research and understand why stock prices move. If more stocks are being bought than sold, prices tend to go up, and vice-versa. If profits and dividends of a company are good, people buy more of these stocks, creating a big demand for them. These are some of the reasons why stock prices go up or down. Try understanding what economists call the law of demand and supply, as this basically moves market prices.
- 3). Find prices of selected stocks of familiar companies over five-year periods, on a daily or monthly basis, preferably in graph form. Identify major ups and downs to know which moves or trends need to be explained. Secure graphs of the Dow index, and of key economic indicators such as gross national product and interest rates. Note relationships existing between movements of stock prices, of the indexes and of economic indicators.
- 4). Secure annual reports of the past five years of the selected companies whose prices movements are being analyzed. Note trends in sales, profits, dividends and other historical developments with the help of an experienced analyst. Compare this data with the graph on prices, understanding that relationships often exist between prices and profits and the general movement of the market.
- 5). Secure some reports of fund managers, showing different stocks held of each stock and each industry, understanding that diversification (keeping several instead of just one stock) spreads risks. If available, analyze prices, numbers of and values of shares bought, and dates of purchases of each stock, understanding that timing is key to investing.
- 6). Learn from a broker (middleman between a buyer and seller) how to buy and sell in the stock market, understanding there are different types of brokers charging different commission rates and providing different services. A broker can assist in most matters from purchase to sales of stocks.
- 7). Devise, with your broker, a stock market investment strategy, such as for example "investing ten percent of your intended capital (total funds for investment) every month for three years in the top two companies of five industries." Understand that investing for the long run differs from short-term trading.
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