This article provides some essential tips that could be useful for those interested in investing (i.e., not betting or speculating) in financial instruments which are listed in the stock market.
It is good to know factors that determines prices of listed securities i.e., demand and supply; economic variables such as economic (GDP) growth, inflation, interest rates, exchange rate, current account balance, etc and how they relate, and impact the performance of the listed share prices.
It is better to know company news (good or bad) have impact on the increase or decrease in share prices.
There is a need to appreciate how market psychology and market cycles factors affects market prices. Some of these aspects have been covered in previous articles. By the way – terms stocks and shares are being used interchangeably, they mean the same in this context.
So, when you buy a stock, you are not buying a lottery ticket, rather, you are actually becoming a part owner of a real operating business. The value of your shares will rise, or fall based on the company’s performance and the perceived fortunes. Many stocks also pay dividends, which are periodical distributions of profits back to shareholders of the company.
By investing in a stock, you are making the shift from being a customer to being an owner.
For example, if you buy a beer or cigarette, you are a consumer of TBL or TCC products, but if you buy a TBL or TCC stock/share, you are buying your ownership of the company — and are entitled to a percentage of its future earnings, as well as its assets.
What and how much can you expect to earn as an investor of a stock? Much as this is impossible to predict, but we can use the past as a (very) rough guide on the potential earnings and gains.
Historically, picking from stock markets with long-time existence and experience, are relatively bigger and mature, stock markets have returned an average of 10 per cent per annum over a century.
But of course, if such data and analysis are looked separately, they may seem deceptive because stocks have the tendency of being wildly volatile along the way — in the process of averaging into the 10 per cent per annum there are cases of ups and downs such that it is not unusual for the market to fall by more than 20 or even 50 per cent in a period of time in every few years.
Analysts and observers tell us that on average the market is down once in every four (4) years.
You need to recognize and appreciate this reality so you won’t be shocked when stock prices tumble — and so you should set your expectations right and or learn to avoid excessive risks.
However, as you do that remember and usefully recognize that the market has made money three out of every four years and continues this trend, even today.
In the short term, the stock market is entirely unpredictable, despite the claims of some “experts” who here and there would pretend to know what is going on about the market!
There are recent examples in which prices and indices sank by some significant percentages — but then made a U-turn almost during that same period and rose nearly as rapidly.
This is true to our market as well, as a keen observe would have noticed this, albeit for us the context may be a bit different given our market size, its nascent and the lack of sophistication.
Despite that, in the long run, nothing reflects economic expansion or the shrink thereof more than the stock market — that’s why it is perceived and viewed as the barometer of the economy.
As it is, overtime the economy and population grow, and workers become more productive.
The rising economic tide makes businesses more profitable and predicted to trend the same in the future, which then drives up the stock prices.
That explains why markets soared in the twentieth century, despite wars, crashes, and crisis.
So, generally it pays to invest in the stock market if you are one of those who would take a long-term view in your investment philosophy and approach.
This seemingly fact of matter makes me, almost, suggest -- over the long-term stock markets news will be good. If you can buy into this “seemingly” factual statement, it will help you to be patient, unshakable and ultimately relatively better-off by investing in stocks of companies listed in the stock market — and of course choices of stocks to invest into matters as well.
So, what exactly does this mean — it means that if you believe that the economy and businesses will be doing better 10-years from now it then makes a lot of sense to allocate a portion of your investment in the stock market.
Of course, it is undesirable that it may be a bit of a challenge to stay in the market long enough to enjoy these gains, given that needs for money for individuals may be abrupt as emergencies may dictate.
In all these, the last thing you want is to be a forced seller during a prolonged bear market. But then how can you avoid such fate? For a start — either don’t live beyond your means or saddle yourself with too much debt/loans — both are reliable ways to putting yourself in a vulnerable position.
As much as possible try to put a financial cushion, you will reduce the chances of raising cash by selling stocks when the market is crashing.
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