Understanding the Stock Market

16. 03. 08
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"Understanding the Stock Market"


One of the First Steps to becoming a Successful Investor is to understand the forces or Investors and Strategies around you and then create your long-term strategy. Each Investor believes their strategy is the best, and more than likely they have had some success in one way shape or form with their strategy.



The easiest way I can describe the Stock Market is that it is very similar to an auction system with Buyers and Sellers, but it is much more complex than that as you start understanding the deeper context of the Market. For example, there are traded Options, Penny Stocks, Short-Selling, and many other forms of Strategies/Options that make the market more complex and may behave in an irrational way. Below is a short description of some of the Forces that move the Market in different ways to help you better understand the Market:


  • Growth Investors: This is a strategy that seeks out stocks that they feel can have a good growth potential. In many cases, a growth stock is defined as a company whose earnings are expected to grow at a higher rate compared to its industry or the overall market.

  • Value Investors:  This strategy of selecting funds that trade for less than their perceived intrinsic value (or what the company is believed to be valued.) Value investors look for companies that they believe are undervalued. They think the market overreacts to good and bad news, that may result in stock price movements that do not correspond with the company's long-term fundamentals. (This is the Strategy I will favor and what I will be talking more about in the future)

  • Hedge Funds: Hedge funds are alternative investments for institutions or individuals with significant assets. They may aggressively be managed to make use of derivatives and/or leverage that could generate high returns (either in an absolute sense or over a specified market benchmark). They tend to have low correlation with a traditional portfolio.

  • Day Traders: Day traders are investors who generally buy and sell the same stock in the same day. They usually rely on some type of chart or statistic to make their trade. This type of trading is not limited to just buying stocks; day traders may also buy and sell stock options, currencies, or a whole range of futures. Typically day traders may hold a stock for a matter of seconds or minutes; additionally they may buy and sell the same stock several times during the course of a day.
  • Passive Investors: This Investor creates a Diversified Portfolio broken up with a collection of Asset Classes including: Large Cap (Large Companies), Mid Cap, Small Cap, and International Companies and knows that a Diversified Plan will win out in a Long-Term Strategy. (This Strategy is common for Retirement Accounts)
  • The Emotional Investor: The Emotional Investor believes the “Sky is Falling” during a Market Downturn. They often Pull Out due to either a lack of knowledge of the Market or a low Risk Tolerance. This  Investor needs to allocate their funds in less volatile investments similar to Money Markets, Government Bonds, or Corporate Bonds based on their risk tolerance.


The Market Will Go Up and the Market Will Go Down… but it’s your Long-Term Strategy that will Win Out in the Long Run.




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Disclosure: www.canstock.com, www.investopedia.com