There’s so much jargon out there these days that sometimes it can be confusing for the novice to understand stock market terminologies and functions. So how to understand the stock market then and make sense of it all?
The first thing you need to do is get with the lingo. You can look up sites such as Investopedia or Investor Words for definitions that you some across while reading the financial section of the paper. Common terms you should know are "market capitalization", often simply called "market cap", P/E ratio, earnings per share, dividends, book value, stock price, and yield.
Once you understand the language, you can move to analyzing a company’s financial reports: read balance sheets, annual shareholder reports, profit and loss statements, cash flow statements and familiarize yourself with these accounting concepts. Read about their long-term plans, directions for growth, which sectors they want to grow and invest in, product developments, brand loyalty, market goodwill, and more.
Next, you need to do some basic economic research. What’s a bull market, what’s a bear market, recession, depression, economic downturn, market analysis, etc – familiarize yourself with these economic terms.
A crucial part of how to understand the stock market is to understand government reports, outlooks and analysis. You should read reports put forth by the Securities and Trade Commission, be aware of the activities of the Federal Reserve and any rising or falling interest rates, and be generally aware of any government legislation that will directly or indirectly impact your stock portfolio (e.g. if you want to hold stock in healthcare and biotechnology companies, you’ll obviously pay close attention to the health care initiatives of the government).
The next step is to conduct online research. Log in to the numerous financial websites such as Yahoo Finance and start researching. Look at stock movements, look at stock tables, read analytical reports and familiarize yourself with the working of the stock market. You can even set up your own online trading account for practice on stock investing.
Learn the functions of brokers, brokerage firms and specialists on the trading floor. Learn how each contributes, along with the buyer and seller, to determining the stock price for any given day. Do a little research on the services offered by full service brokerage firms and by discount brokerage firms and understand the differences in services and commissions. While full service brokers may offer value in terms of stock management and advice, discount firms will get you a trading account and let you learn and manage on your own, so choose a style you’re comfortable with.
Read books, magazines and investor advice on how to understand the stock market. Play simulation stock market games by not investing real money but practice in the virtual world until you get the hang of it.
Learn how to invest for income or growth and not for speculation, which might be risky for a beginner and could burn you right at the start, thus making you afraid to delve deeper into stock market investing.
Learning how to understand the stock market is a crucial first step before you can begin actual investing practices. Follow the strategies outlined here to make sure you’ve covered all the bases in your research. This way you will start stock investing more confidently.