A brief guide on how to invest in the stock market

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A brief guide on how to invest in the stock market

The stock market has attracted both small-time and seasoned investors by the zillion. Quick gains, coupled with high risk, is any beginner’s stance on stock markets. However, contrary to the popular belief that the stock market rides on luck, there are fundamentals that drive the stock market. Speculations, no doubt, find a place in stock trading. This may work to your advantage in respect to penny stocks; however, for long-term investing, core technical analysis is what guides you on how to invest in stocks.

The stock market today is completely technology-driven, allowing you to trade in any of the world’s stock exchanges. But, it calls for a good amount of knowledge and analysis that will help you pick the right stock at the right price.

For an investor who has been bitten by the stock market bug, get down to some research and analysis before you invest in a stock. These include the company background, its financials, and most importantly, credit rating.

Company documentation
As a potential investor, you need to be aware of the company profile, the directors on its board, and the annual report outlining the performance. The following list of documents gives you an insight on the company:

  • Form 10-K, which is annually filed by the companies with the Securities and Exchange Commission, is a comprehensive and important research document that provides the investor with all the necessary information. The quarterly version of Form 10-K is the Form 10-Q
  • The Proxy Statement gives information on the board of directors, shareholder proposals, and management compensation
  • The most recent annual report that outlines the chairman’s future prospects of the business
  • A statistical depiction of the company’s performance in the past 5/10 years

Financial information
The performance of a stock is majorly impacted by its financials. If you choose to pick a stock, you need to completely analyze and decipher its financial statements. These include the balance sheet, income statement, and cash flow statement.

The income statement reflects the profit/loss made by the company during a financial year. The cash flow statement is a reflection of its liquidity. A whole and complete picture of a company’s assets and liabilities is offered by the balance sheet. All the above 3 financial statements analysed together will present the true net worth of the company’s stock in which you propose to invest.

When you desire to build a stock portfolio, you need to research on the company profile and its financials before you invest.

A strong fundamental and technical analysis is what helps you to pick the right stock. Stock prices are dependent on a number of factors. Market factors, both macro and micro, as well as individual stock profiles along with investor sentiment, play a crucial role in determining the stock prices. Hence, the fluctuations that you witness are in intra-day and inter-day stock transactions.

Tools for technical analysis
Stock trading can’t be successful by conviction alone. It, in fact, increases the risk of incurring losses. Hence, there is a need for technical analysis, which helps to predict future stock prices based on historical prices. Trend analysis and law of averages are applied to predict a trend using scientific tools. One such investor-friendly tool is the Stockchart.

Stockcharts, which are a graphical representation of the stock prices or trading volume over a period of time, is a frequently used tool by technical analysts to predict the future price of a stock, based on the change in price and volume.

Technical stockcharts can take the form of bar charts, line charts, point and figure charts, and candlestick charts. The rise and fall in the graphs help the analyst to study the trend, identify the high and low prices, and also fix with certainty the stock price in the stock market at a future date.

Thus, with the help of such technical analysis tools, an investor will be better informed as to when he has to buy/sell a stock.

Investing your money in stocks
If investing your money is stocks is your choice, here are 4 ways to do so:

  • Invest through a 401k plan
  • Invest through a brokerage account
  • Invest through traditional IRA, Roth IRA, SEP-IRA, or simple IRA account
  • Invest through direct stock purchase plan or dividend reinvestment plan

Playing in the stocks is risky indeed. So before you actually get down to buying a stock, ensure that you have done a sound fundamental and technical analysis. Measure your risk tolerance level as well. It’s best that when you build your portfolio, diversify your investments. Opt for a mixture of big cap, medium cap, and small cap stocks. This is the key to becoming a successful investor.