Stock Market Investing for Beginners

Stock market investing involves investing money in stocks to generate a profit. Because of all the variables involved, stock market investing is an inherently risky pursuit with many pitfalls and no real guarantees.  This is particularly evident during the down times. In order to find success, stock market investors need to understand how the stock market works.

How Stock Market Works

A stock market is essentially an auction market where different companies sell shares, or stocks. The stocks are bought and sold to the highest bidder. Companies sell their shares to raise money quickly. By buying a stock, the investor buys a small share of ownership in the company.  In practical terms, the ownership doesn't give the investor much power, but it does entitle him or her to the portion of the profits. As a company becomes more successful, the stock's value increases. At which point, the investor can either sell it or wait and hope that the stock's value will continue to increase.

The downside of this is that if the company's financial situation takes a turn for the worse, the value of the stock will plummet accordingly. However, it is important to understand that every company has it's ups and downs, so even in the best situation; there will be times when stocks lose value. Stock value drops doesn't necessarily mean the investor should cut his losses and sell.

Finding Good Stocks to Invest In

Investors must be able to understand just how much the stock is worth and how it's value will fluctuate in the days, weeks, months or years to come. In order to determine value, investors must examine the company's financial statements. This includes the following documents:

  • Annual Report - a document released by a company at the end of it's fiscal year. It includes a detailed description of every facet of the company, including budget information, a listing of expenses and salaries, a breakdown of it's earnings and other financial information. The annual report can usually be found on the company's website.
  • The 10K - a document filed with the US Securities and Exchange Commission (SEC) every year, it is basically a more detailed version of the financial statements that are included in the annual report. Investors can request it from the company or look it up at SEC's official website (www.sec.gov).
  • The 10Q - same as above, except it's filed on quarterly rather than annual basis. Examining it allows the investors to uncover changes and policies and other recent developments that may not be available in above documents (at least until the end of the fiscal year). They can be obtained the same way as above. It's important to keep an eye out for highly leveraged companies and review any new loans the company may have taken.

Other Considerations

While the above information is valuable, investors should keep in mind that there are other factors that affect the value of the company's stocks, factors that the company has little to no control over. This includes natural and man-made disasters, wars, a new law and new regulations, discovery of new technologies and other large-scale events have a potential to effect the company's ability to make profit in significant ways.

The aftermath of Hurricane Katrina, for example, disrupted the delivery of oil from the oil platforms in the Gulf of Mexico, which had a profound effect for every company that relied on oil. The effects of the event don't necessarily have to be negative. For example,  the invention of the first commercial Internet browser opened up Internet access to the masses, which gave thousands of businesses an opportunity to flourish.

No investor would be able to anticipate all potential stock-changing events. But he or she can try to anticipate some of them by following and scrutinizing the news, keeping an eye out for the latest stock market trends and paying attention to the latest developments in whatever field the company belongs to.

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