Investing in stocks is an old phenomenon. Stocks are one of the oldest types of investment and stocks make up a certain portion of every investor’s portfolio. While it may seem easy to invest in stocks, it really isn’t, especially if you are a beginner.
If you are looking to invest in stocks, here are 6 things you need to know.
1. Stocks Aren’t Paper.
Buying stock of a particular company means holding a share of ownership in that company. Stocks aren’t just pieces of paper. They in fact hold a lot more weightage as they grant you ownership of the given company.
2. Stocks Fluctuate.
Stocks fluctuate, just like any other type of investment. In the short run, stocks are most affected by news, rumors, fear and enthusiasm. In the long run, the company’s earnings affect them.
3. Performance Doesn’t Always Translate Into Higher Earnings.
A lot of people think that if a company is performing well, its stock will inevitably increase in worth. The truth is that stock prices are dependent and are based on projections of a given company’s future earnings. Those aren’t actual earnings but only the prospective earnings of the company. Of course, a company that is performing well is more likely to have a stronger and more solid stock as compared to one that doesn’t but know that even the top companies can easily slip.
4. Stocks And Market Don’t Always Correlate.
While stock prices are dependent on the overall performance of the market, it isn’t always necessarily true. A good stock may increase in value even when the market is declining whereas a stock that is already on a downward spiral may increase in worth when the market is doing well.
5. Stock Prices Are Compared To Other Factors For Value Assessment.
In order to get a good grasp and sense of the stocks, whether it is undervalued or overvalued, investors turn to other factors for value assessment including cash flow, revenue, earnings and others as these factors have a direct impact on the stocks worth.
6. Gather Stocks From Different Industries.
The key to investing in stocks is to aim for portfolio diversification, This means picking big stocks from different industries to redirect your investments in. If you are only covering one particular industry and if that falls, you will bear all losses. However, if you have stocks from different industries, the loss burden will be minimized.