Stock Market Investing Basics: A General Perspective

Stock market investing basics involves understanding how investing works. As an investor, your investment goals and objectives drive the decisions you make when buying and selling stock. This decision is influenced by a variety of factors. It is important to know and understand the factors involved in order to minimize your exposure to risk and maximize your potential profit.

Understanding Risk

Investing involves risks. Depending on the type of investing that you do, your stocks can be subject to any of the following risks:

  • Market risk: the risk that the market price will fall making the stock significantly less than your purchase amount.
  • Purchasing power risk: the risk that the stock’s earnings may be less than the rate of inflation.
  • Interest rate risk: the risk that a stock, like a utility stock, has insufficient earnings to make required interest payments.
  • Political risk: the risk that a country’s political climate will make it difficult for a company to operate.
  • Default risk: the risk that the company will be subject to a loss in value due to a downgrade in its credit rating.

Understanding the risks associated with a stock that you buy will allow you to balance it with another type of stock that is not subject to that risk. It should be noted that the risk of investing is something that van never be eliminated but can be managed.

Diversification and Asset Allocation

Diversification and asset allocation are tools used by investment managers to balance risks in a portfolio. Diversification relates to a practice of balancing different types of investments within a portfolio in order to reduce its risk profile.

Asset allocation determines the percentage or proportion of any one investment type that an investor’s portfolio is concentrated. Employing a strategy of diversification and asset allocation should be used by every investor as a way to control certain risks.

Buy and Hold versus Speculation

An investor can be just as successful buying and holding stocks for a long time as they are from constantly trading an account for short-term profits. The type of strategy that an investor employs depends more on need than it does on applying the same standard for each investor. Many of the practices mentioned previously apply to value investors, or those who hold investment with good earnings, in the same way that they apply to speculative investors looking for quick returns.

Regardless of your investment goals and objectives, learning about the way the stock market works provides you with the basis for determining an appropriate investment strategy. Having an appreciation for risk and willingness to employ strategies designed to minimize those risks will give you a good perspective of how you can benefit from the stock market.

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