Investing In Stock Market

Naturally enough, most stock market investors want the value of the stocks in their portfolio to rise.  The question of course is how to determine, before purchase and investing in stock market, the true value of a stock.  A stock’s value will partly rest on whether it is likely to appreciate in value. Understanding whether such capital appreciation is likely depends on identifying the factors that could contribute to this.

At the risk of stating the obvious, let’s go (briefly) back to basics.

First, what is a stock or a share? A share is a part of a company, and the act of buying a share is essentially an investment in the relevant company’s ability to generate profits in the future.  Obviously, (in most cases) companies that perform well will see the price of their stock rise, and companies that perform badly are likely to see it fall.

Second, what is a stock market. The stock market for a given listed company is essentially made up of two groups of individuals,  those that wish to buy stocks in the company and those that wish to sell them.

So what is the rationale for the linkage between a company’s performance and the price of its stocks?   Indeed, on some occasions it seems that the linkage does not exist – markets can appear to act “irrationally” in their pricing of stocks.  However, in general, a stock’s price reflects the market’s “sentiment” about the stock’s true value, and hence whether it should be bought or sold. Where there is an excess of buyers to sellers for a given stock, that stock’s price will rise,  and where there is an excess of sellers to buyers the price will fall, until (in both cases) equilibrium is reached. (It is important to note that stock price for a given company can fall even in circumstances where the company’s performance improves, for example in cases where the company, despite performing well, has nevertheless failed to meet the market’s expectations.) As such, it is important for investors to acquaint themselves with a company’s underlying financial performance prior to investing in its stock.

What are the rules for successful stock trading?

In order to succeed in the stock market, investors need to make independent judgements based on their own knowledge. The mentality of simply “following the herd”, that is, following the investment patterns of other investors, does not bring success in the stock market.

So what elements of the investment process are under the investor’s control? Try as they might, investors cannot exert any significant degree of control over the market. Only large financial institutions can affect the market in this way, and even those bodies only exercise partial control. However, investors can control the way in which they act, and this extends to the way in which they use their market information.

So what is the most effective way for investors to use market information to operate? The answer seems to be that investors should pre-determine logical rules by which they will operate in the market, and then dispassionately stick to those rules. As we know, rules in society exist to moderate and control social behaviour. In the same way, an investor’s own rules can logically influence his or her own investment behaviour, and remove the “emotional” element from trading. For example, rules should create a structure and pattern for the way in which a trader selects stock from the wide variety available. Often it is the trader’s ability to stick to these rules that proves the difference between success and failure in the market place.

There will always be room in the market for beginners to learn about the principles of successful investing and to conduct meaningful stock market prediction.  But it is important that all investors, whether experienced or not, access the best advice available to them (i.e. retain the services of a reputable stock broker). There is no reason why those prepared to learn, to conduct research, and to operate in the market in a rule-based and disciplined manner, should not make profits from stock trading.