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Understanding the
Stock Market
MIND MAGAZINE | “Buy low,
sell high” is basically the only thing you have to do to make a fortune
on the stock market. It’s easy, you find a company share (or stock) that
is under valuated, you buy some of them, you wait for the price to go up
and finally you sell and make a generous profit. Easy as one, two,
three. So why is the stock market so risky if the rules are so simple?
Finding a bargain on the Dow Jones or the NASDAQ depends somewhat on
chance, but above all you’ll need to make careful research and wise
decisions to become successful at this game. Markets opportunities come
and go, and having a bit of knowledge and understanding can help to make
wise investments.
The New York Stock Exchange (NYSE) was established in 1792. Based on
Wall Street, it’s the oldest stock market in the world. Basically, the
NYSE was created because people realized that trading shares of a
company was not only beneficial for it’s financing, but also a lot of
people could make good money just by buying and selling stocks. The idea
really got popular, and during the following years the market constantly
grew stronger. This phenomenal expansion made understanding the market a
complex business, intimidating even the most knowledgeable investors. So
one day, Charles Jones, came up with a system (called an index) to do
what indexes do: simplify things. Instead of checking on the market by
looking through the changes of all the stocks, the 11 most important
companies were selected to form the DOW JONES index. The added value of
all those stocks gives the value of the market, and you can figure out
how the market is doing just by looking at that figure. Basically the
Dow Jones is a tool that helps investors to know how the NYSE is
performing.
Today, the Dow Jones is made out of the value of 30 stocks: IBM, Home
Depot, General Electric and Wal-Mart are all part of the index nowadays.
The same system works for all the other indexes in the world. For
example the S&P 500 is made of the value of 500 selected stocks; the TSE
300 (Canada’s stock exchange) is composed of 300 Canadian companies, and
so on. Whenever you heard the market went up, it means that the value of
the stocks part of the index have gone up. Stock of important companies
have a special name, they’re called Blue Chips. They are, as mentioned,
stocks of established companies that have solid foundations and have
important roles to play to determine the outcome of a trading session.
This name comes after the blue chips poker players use to represent
cash.
Still, the market always seems to go up and down without any logic.
Didn’t anyone try to find an explanation to what’s going on? Well, a lot
of people have tried to unravel the solution and serious studies have
been made by eminent scientists who have come up with only one
conclusion: you can’t predict the market. People trading stocks are not
really rational and they will most of the time follow their gut feeling
rather than anything else. Yet, some statistical analyses have come up
with surprising results: the worst month to invest in is November, and
the month producing the best returns is January. Also wacky studies came
up with other “scientific conclusions”. For example, whenever a team
from the National Division wins the Super Bowl, the market is likely to
go up during the next year.
So if the market is so unpredictable, has anyone ever made money in it?
Of course, and there are a couple of rules to be successful on the long
run when you’re playing on the stock market. For investing, Warren
Buffett is the name to remember. Buffett is the most successful investor
of all times. He started from scratch, and he managed to make an immense
fortune by carefully choosing in which stocks to invest. Now worth 28
billion dollars, he is part of the select club of the 10 richest persons
in the world. There is no secret to his fortune, simply a lot of rigor.
While results may vary, Buffett’s recipe for success is probably the
surest way to make the most out of your investments.
In large the technique is simple, Buffett diversified his money in
different sectors of the economy and he always refused to invest
spontaneously or to speculate on the value of a stock. Rather, Buffet
always opted for shares of companies with high long-term value. Of
course, blue chips are way up there in the list of good investments
according to Buffett. But, analysing smaller companies with solid growth
possibilities in the long run will often turn out to be rewarding. If
you’re among the first to realize the potential of such a company, then
investing in it will surely provide good returns.
Nowadays, the Internet is a great tool to learn and to invest on your
own, making you more free to use your money the way you want it. Of
course, the stock market is a complex mixture of information, rules,
chance, etc. Everybody makes mistakes when playing on the market, but
investing wisely and seriously is your best bet. But no matter what,
your success will be based on your understanding of the stock market.
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