While many people believe following the crowd is a sure-shot way to get ahead in the stock market, this may not always be advisable. It is important to do your own research and learn how the market works. To find the right stock, ask yourself if you would be willing to stay invested for 10 years; if the answer is affirmative, it means that you have faith in the company’s bottom line, product, vision, and current management.
Here are the basic stock market tips to follow in order to stay ahead.
1. Be mindful of the basics
It is important to learn as much as you can about the stocks that comprise the market. Sometimes, the stocks will all be moving in the same direction and sometimes the averages slide by a hundred points, but some companies perform well regardless. One of the most useful stock market tips is being familiar with the following:
- It is crucial to know financial terms like the P/E ratio (Profits to Earnings Ratio) or the ROE, which is the return on equity. The CAGR or the compound annual growth rate, will tell you what returns to expect. Similarly, the EPS (earnings per share) is critical to your understanding of the market.
- It is important to learn how fundamental analysis of stocks is performed and select some specific stocks and enter the market at a certain point. It is also important to evolve a stock market strategy in order to maximize gains over a period.
- Certain phrases and order types are important like stop-limit orders, limit order, market orders, trailing stop-loss orders used by investors.
- It is also important to learn about different kinds of accounts. Regulations by the market may call for margin accounts. It is advisable to know how margins are determined and what maintenance margin and initial margin requirements are.
2. Avoid leveraging
One of the greatest stock market tips is avoiding leveraging. It is a strategy that should not be incorporated by beginners. It means using borrowed money to invest in stocks. Banks and some brokerage houses can lend 50% of the purchase price to the borrower via their margin account. These borrowings have an effect on the price movement and many use that to sell the stock at a higher price. If the stock moves up, you can sell, return the loan amount to the bank or brokerage house, and make a profit. However, the reverse is also a real possibility. If you happen to invest and the price of the security slides, you could lose 100% of your investment and you would have to repay the amount that was loaned to you along with interest. Leveraging entails risk and is generally used by experienced investors.