Demystifying the Stock Markets

Golden Rules of understanding and entering the stock market. 

Know the Company

The legendary investor Warren Buffett purchases businesses, rather than stocks per se. A good investor undertakes thorough research of companies, sectors and the overall business environment before zeroing in on select companies. He looks at diverse parameters such as whether the company belongs to a growth industry and dominates that space. 

Look for Value

Determining the valuation of a stock is the first step towards intelligent investing. An investor can make informed buying decisions when he knows the intrinsic value of a company, its business profitability and future market share. A golden rule of investing is to buy low and sell high. Stock markets normally swing between unbridled ‘bullish’ euphoria and extreme ‘bearish’ pessimism. It makes immense sense to buy fundamentally good stocks (not the cyclical and weak companies) during a market and economic down-turn as they would be available at attractive valuations and will bounce back in the event of a turnaround in fortunes.

Cultivate a Long-Term Vision

There is a universe of stocks and volatility is intrinsic to stock markets worldwide. Stock corrections are inevitable, and when they strike with typical ferociousness, stocks across the board get swept with the tide. What, however, separates the quality stocks from the cyclical and junk names is that the good stocks tide over momentary price fluctuations and emerge victorious in the end. It therefore makes good strategy to accumulate on every dip, for the long term, provided one chooses high-quality names and abstains from the purely speculative.

Take the First Step

It is never too late to board the stock market gravy train. One doesn’t have to be a millionaire to invest in the markets. A person can start small by purchasing a handful of shares, depending on financial capacity and risk appetite, and then take it from there. Even a person in his middle age has 2 decades of work productivity and earning capacity ahead of him and can make the best of his expected earnings by taking the investment route. Moreover, taking inflation into consideration, stock investments provide the best returns as against other financial instruments such as bonds and real estate.

To conclude, the stock markets can be an extremely confusing and intimidating place for a newbie. But they can reveal their mystique just as easily, to a person who is willing to learn the ropes, follow the rules and carve out a winning strategy.