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How to Play The Stock Market

How to Play The Stock Market – There Are Many Different Strategies

How to Play The Stock Market

How to play the stock market is dependent upon many factors, including:  an investor’s risk tolerance, the amount of time an investor intends to hold an investment, and an investor’s investment goals, among many others.  How to play the stock market is also influenced by factors such as the age of the investor and the amount of money an investor has to invest.

The traditional way how to play the stock market and a strategy that many investment professionals advise their clients to follow is a buy and hold strategy.  This strategy is just as it sounds, you buy into the stock market and hold until you need to use the money.  The reason why the buy and hold strategy is popular is because over longer periods, such as 50 or 100 years, the stock market has historically returned between 7% and 15% per year, depending up the stock sector that an investor is invested in.  This impressive return on investment includes collecting and reinvesting stock dividends, which can accumulate greatly over time.  However, an investor must be prepared to ride out the occasional stock market corrections to realize significant gains from the buy and hold strategy.

Another popular way to play the stock market and a strategy that is similar to the buy and hold strategy is the dollar cost averaging strategy.  Many people are already using this strategy when they invest in the stock market through their 401-K via mutual funds.  The idea with dollar cost averaging is that an investor buys a similar amount of shares periodically over a period of time and as the market gyrates, the investor will purchase a great number of shares at times when stock prices are low and will purchase a lesser number of shares at times when stock prices are high, thus lowering the average cost of buying shares.  In similar fashion as the buy and hold strategy, the dollar cost averaging strategy requires an investor to hold their stock positions for a long period of time to realize significant gains.

More aggressive investors pursue a number of different market timing strategies.  A market timing strategy involves studying stock market valuation indicators closely, and buying and selling a stock position or an entire stock portfolio based on buy and sell signals.  This strategy is risky and requires a great deal of research and market observance to detect market trend changes that could indicate a buy or sell signal.  For more information about stock market valuation indicators, see:  Advice On Stocks.

How to Play The Stock Market – Other Factors

When considering how to play the stock market and investment strategies, an investor should also consider their age and the amount of money they have to invest.

Generally, younger investors are encouraged to be pursue a more aggressive investing strategy, since they have more time to recover from mistakes and could realize big returns if they are successful.  As investors grow older, they should become more conservative in their investment strategy, which could even mean pulling out of the stock market altogether when nearing retirement age and putting one’s lifetime of investment returns into a safe fixed income investment.

The amount of money an investor has to invest can also influence their investment style.  An investor with a great deal of money may want to pursue an aggressive investment strategy for a percentage of their money, while an investor with a modest amount of money may want to either risk more via an  aggressive investment strategy to grow their money or pursue a more conservative investment strategy to protect the little money that they have.  Ultimately, how to play the stock market is up to an individual’s preference and risk tolerance, but adhering to the widely followed rule of protecting one’s money when nearing retirement age is a good investment strategy for anyone who wants to have their money available during their retirement years.

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Advice On Stocks – Definitions and Valuation Methods

Advice On Stocks – Stock Definitions

Advice on Stocks – Stock Definitions

Advice on Stocks

Finding advice on stocks via the Internet, including stock definitions and valuation methods, can be confusing due to the vast amount of information available on this topic.  The following is a concise one-stop source for advice on stocks.

A stock is a financial security that is sold by a corporation that represents a share or fraction of ownership in a corporation.  Corporations issue stock to raise capital for various needs, such as business expansion.  There are two types of stock that a corporation can issue that have specific rights and privileges associated with ownership:  a common stock and a preferred stock.

A common stock includes company ownership rights.  A person who owns common stock in a corporation has the right to vote on a slate of board of directors and on policies proposed by the company or other common shareholders.  If a company enters bankruptcy and is eventually liquidated, holders of common shares are last in line for reimbursement, with preferred shareholders and holders of debt, such as bondholders, having priority.

A preferred stock usually has no voting rights associated with ownership, but will often include a legally defined dividend that is payable to preferred stockholders before a dividend is paid to holders of common stock.  Preferred shareholders are given preference over common shareholders in the event of liquidation of company assets.

There is a variation of preferred stock called convertible preferred stock, which is a preferred stock that can be converted into specified number of common shares after a specific date has passed.

Advice on Stocks – Stock Valuation Methods

There are many valuation methods used by both individual and professional investors to help them determine the actual value of a stock and to make informed investment decisions.  The most common and most widely used stock valuation method is the price-to-earnings ratio (P/E ratio).

The P/E ratio is a number that is derived by dividing the price of a stock by the past year of reported company earnings per outstanding shares (known as trailing earnings).  For example, if ABC Corp is selling for $40 per share, and it earned $2.00 per outstanding shares, then ABC Corp’s stock has a P/E ratio of 20.

Turning a P/E ratio valuation into a useful real world valuation is a lot more complicated.  This is because there are many factors that can affect the P/E ratio going forward, including the future stock price, future changes in the number of outstanding shares, and future changes in earnings.  P/E ratios are also valued on less tangible measures, such as the industrial sector that the stock is in and whether the overall stock market is in a bull market (rising) or a bear market (falling).  For example, if ABC Corp’s stock has a P/E ratio of 20, whether or not this P/E number is overvalued or undervalued is dependent upon not only whether the earnings in the future will keep pace with or exceed the prior year, but is also upon the industrial sector that ABC Corp is in and where the overall stock market is heading.  For a banking stock, a P/E ratio of 20 would be considered high regardless of other factors.  However, for a technology stock, a P/E ratio of 20 would be considered low, especially in a bull market.

PEG ratio has become a popular stock valuation method because it builds upon the P/E ratio to include a stock’s earnings growth rate.  The G is for growth.  To calculate a stock’s PEG ratio, use a forward P/E estimate for the year ahead and divide it by the anticipated earnings growth rate for the year ahead.

Other common stock valuation methods include (but are not limited to):

  • Book value
  • Earnings per share (EPS)
  • Earnings yield

An investor can often save themselves from doing complicated stock valuation analysis by reading stock analyst valuation assessments, since many stock analysts publish advice on stocks based on various stock valuation methods..

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Stock Market Advice – Definitions and Strategies

Stock Market Advice – Stock Market Definitions

Stock Market Advice

The best stock market advice is to first understand the definitions of what the stock market is comprised of and to understand basic strategies that are used to make money in the stock market.  The Internet has opened up a wide array of stock market advice that is easily accessible to investors, including stock market definitions and basic strategies, which are outlined below.

The Stock Market is really a collection of stock trading markets, which themselves are comprised of thousands of individual stocks.  The major stock trading markets in the United States are the New York Stock Exchange Euronext (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ).  In 2008, The American Stock Exchange (AMEX), which was considered another major stock trading market, was purchased by the NYSE, and is now a division within the NYSE.  The NYSE and NASDAQ have stringent listing requirements for companies that wish to have their stocks traded on their stock markets.  These requirements include such metrics as maintaining:  a minimum number of shareholders, a minimum bid price for the stock, and a minimum market capitalization.

In addition to the major stock trading markets, tens of thousands of company’s stocks trade on Over The Counter (OTC) stock quotation systems, which include the Over The Counter Bulletin Board (OTC BB) and OtcMarkets.com (Pink Sheets).  Stocks that trade on the OTC BB do not have to meet any listing requirements, with the exception that they must be fully compliant in their reporting to the Securities and Exchange Commission (SEC).  There are no listing requirements for stocks that trade on the Pink Sheets.  However, Pink Sheets has its own tiered ranking system for stocks that trade on their quotation system.  This ranking system segregates companies based on their reporting status to both the SEC and to Pink Sheets.

There are three major Stock Market Indexes that are used to gauge stock market performance, including: the Dow Jones Industrial Average, the NASDAQ Composite index and the Standards and Poors 500 index (S&P 500).  These indexes are comprised of companies that are selected based on their representation of segments of the economy.  The Dow Jones Industrial Average index focuses on industrial companies.  The NASDAQ Composite index focuses on technology companies.  The S&P 500 index is a broader index that focuses on a wide variety of companies.

Stock Market Advice – Stock Market Investment Strategies

Stock market advice as it pertains to stock market investment strategies comes down to one basic investment rule that is known as buy low sell high.  The whole point of investing in the stock market is to make money, and to do so you have to buy when a stock is low and sell it when it is high.  To better understand what a stock is and how to value a stock to determine when to buy and sell, see Advice On Stocks – Definitions and Valuation Method.

Understanding how the stock market performs in relation to economic cycles can improve your investment performance.  Many of the best buying opportunities in the stock market occur when the economy is going into a recession and a stock market selloff occurs.  There’s an old saying on Wall Street, “buy stocks when nobody else wants them”.  This is perhaps the best stock market advice of all, since eventually the stock economy will grow again, companies will report growing earnings, and the stock market will respond by moving higher.

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