Understanding the stock market’s effect on private stock investment

Date Tuesday, January 20th, 2009

There are a few very essential ideas that you must understand before you consider investing in the stock market. If you do not understand these ideas or do not know of their existence, then you are already at a disadvantage. The following list is what you must always keep in mind when trading/ investing/ whatever you call it.

1. The stock market is controlled by two emotions: Greed and Fear (If it feels like you have heard this before, it’s because it is true and not because people keep copying what others say.) Greed can cause you to wipe away any chance at profit or simply reduce the possible profits you had at one point. The same can be said with fear. It will cause you to sell for a loss, sell too early, and stay on the sidelines for too long. I’ve fallen victim to both of these multiple times. I hope I have learned my lesson by now, but hope is not something you should use when investing.

2. Stocks are pieces of paper, well I guess at one time they were, now they are simply pieces of electronic data. (The NASDAQ is an OTC exchange, which means there is no physical trading floor in New York or Chicago. It’s all just a bunch of computers creating an electronic exchange.) Just because a stock is from XYZ Company does not mean that the stock directly reflects the direction of that business. The big time institutions can literally move a stock any way that they want for the sheer motivation of making profit. (That depends on the market cap, etc. of the stock of course.)

3. There will almost always be someone who has better information than you or has beaten you to the trade.

4.The key to the stock market is timing. It has nothing to do with the amount of information you have. For example, if I had inside information on the company I work for and I waited 8 months to trade on it, I most likely would have missed out on my opportunity because the information would either be public or insignificant. That may not be the best example, but if you think about it…it works.

5. Most investors will end up losing money in the long run. I am talking about the actual individual investors, not the people who throw all their money into mutual funds. The actual stock buyers and sellers. Most will lose some or all of their money. If it was too easy, EVERYONE would do it. I mean come on…the market opens late in the morning and closes early afternoon. Who wouldn’t want that job?

Keep these ideas in mind and you will have a better understanding of investing. I am not saying that this is a foolproof plan or that it is correct 24/7, but they are simple ideas that you use to expand your knowledge and make some cash.

by Brian Durbin

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