Introduction:
Arguably, stocks are the most popular investment vehicle around. For general investing and specific retirement plans, the stock market has grown to become the financial market of choice.
However, before you invest in it at all, you should know one or two things about it.
What are Stocks?
When people talk about stocks, they are talking about the ownership of companies. The stock of a company, for real, is the total number of shares into which its ownership has been divided. A single share, therefore, is a fraction of its ownership.
The Stock Market.
As a result, the higher the number of the shares of a company you have, the higher your ownership stake in it. Take Lasda Inc., as a hypothetical example. Lasda Inc., has 10,000 shares outstanding out of which you own 1,000. That means that you own 10% of Lasda.
Your 10% ownership in the company makes you entitled to a corresponding portion of its assets and earnings. You can decide to sell a part of or all your stake anytime on the stock exchange. Otherwise, if you are very happy with the company’s performance, you may decide to even add to it.
The Stock Market
The stock market refers to stock exchanges where the shares of companies are listed for trading. The US’s New York Stock Exchange (NYSE) and the Nasdaq, Japan’s Tokyo Stock Exchange, and China’s Shanghai Stock Exchange are some of the largest stock exchanges in the world.
Just like any other market, the stock market is made up of buyers and sellers. Those buyers and sellers influence the demand and supply of the listed stocks and correspondingly their prices. For example, when investors heighten their demand for a particular stock, its price tends to rise.
Conversely, when their demand is low, it falls.
The Bulls and the Bears
At every point, participants in the stock market can be classified as the bulls and the bears. The bulls are those investors that are optimistic about the performance of a stock. So, they are buying a lot of its shares. On the other hand, the bears are the pessimistic ones. As a result of their fear, they are rather selling its shares.
Consequently, a bullish market is created by bulls, when their optimism is replicated generally across the market. A bullish stock market indicates that most investors are confident about the direction of the economy. So, they are pushing the valuations of companies to higher and higher levels.
On the other hand, the stock market is declared bearish if the stocks listed on it fall, sometimes by as much as 20% of their prices. Bearish stock markets are triggered by fear which has resulted in massive selling. When investors have become less confident about the performance of a company, they usually dump its shares.
Investing in the Stock Market
To start investing in the stock market, you need an account with a broker who will serve as the intermediary between you and the stock exchange. There are many strategies for stock market investing. One is contrarian investing.
Contrarian investing recommends you buy in bearish market conditions and sell during the bullish ones. No matter the strategy you use, to assess its effectiveness, you can compare the performance of your portfolio to that of the different market indexes such as the Dow Jones or the S&P 500.