With a light supply of your own phone and an internet connection, you are able to invest in stocks with an investment app, perhaps one of those that is commission-free when trading. Still, if you are new to this, chances are that you want to invest because you are following the trend or you are looking to make a quick buck.
Or maybe you genuinely want to invest without treating it like a casino, but you are still nervous about buying a stock and waiting for your investment to grow. Take it easy and apply the brakes.
Keep in mind that this is not professional financial advice, and it will have nothing to do with crypto at all, even when they are no different than other stock markets save for their extreme volatility. Before jumping in, there are two theories that you may want to be aware of.
Firm Foundation Theory
This theory argues that an investment has an anchor called “intrinsic value,” or real value, which is based on the analysis of present and future prospects. According to this theory, the prices are never at or around the value, rather it is only either overpriced or underpriced. When market prices fall down or rise, a buying or selling opportunity arises.
A concept called discounting is used after the intrinsic value of a stock is determined. It essentially means that you look at the opposite of your money. It is not about how much it will grow in the future, rather it is about looking at the expected income in the future and seeing how much less it is currently worth.
The theory also argues that a stock’s value is based on the stream of earnings distributed in the future by a firm in dividends. In short, the greater the earnings and their rate of increase, the more valuable the stock.
Castle In The Air Theory
Unlike the firm foundation theory, this one is more psychological. The value of a stock is based on how likely the investors will behave in the future and in the periods of optimism, they tend to build “castles in the air” and in the process, be bullish for some time until the pinnacles of greed have reached their peak. At that point, the bulls exit and the bears come in.
A buyer believes that a stock is worth a certain price, so they buy it, hoping to sell it to someone else at a higher price. The cycle repeats as the new buyer has the same expectation. This also applies to a similar theory called the greater fool theory, where after selling overpriced stocks to “fools”, the market will eventually run out of them and the prices drop.
The Market Is Never Constant
Time to be straight about it. Despite the theories and other expert explanations, you can never claim that you know how the market works because it may mean that you can predict it one hundred percent when this is impossible. The market is always random and ever changing, sometimes throwing off professionals and even making their theories obsolete.
This is true as there are a lot of factors that can change the market, ranging from change of policies, political developments, unfavorable or unexpected good news. It is akin to a train that sticks to the rails until it suddenly goes off track and either crashes or miracally lands on another, smoother track, all to the surprise of its passengers.
Even blue chip stocks aren’t spared from the randomness. Prices may still be stable and the stocks may remain standing, but the former can still rise or fall from their initial values based on the companies’ developments and their public reputations.
Take this as the first advice.
Buy The Whispers, Sell The Bulls
Buying a stock that is at an all time high, or while the market is in a bullish mood, is mainly risky because just as mentioned in the previous section, you can never predict where the market is going. The moment you made up your mind to buy that stock, it may already be too late and the price may also drop earlier than you expected.
You only have an advantage if you have already bought the stock prior to the bullish period. When you think that the price may not go any higher, sell your share. Even if the bulls aren’t done, at least you made a safe exit.
In contrast, you may buy a stock while the market is calm, but do you know what is better? Buying when you are early to catch any recent developments or you have found a use case that not many people aren’t aware of yet. This leads to the third piece of advice.
Lots Of Research
Do lots of reading and research. Before you even enter the world of stock market trading, it is very recommended that you read books or articles to gain knowledge about the subject, and then read about the stocks that catch your attention. The more time you spend on researching them, the more you are able to get ahead of other traders and be prepared.
Researching also allows you to determine the value of stocks. When the price that you bought dropped, you may panic if you hadn’t done your research. However, as long as you are convinced that the investment is actually valuable in the long run for good reasons, you will be okay.
Bulls and bears always come and go. Patience is rewarded. Speaking of patience…
Think long term
When you are investing, you put your spare money aside and wait for it to grow for at least a few months to years, depending on the performance of the stock. Investing in the long term also allows you to try and time the market while getting ahead of the news, whether you are buying or selling.
You have probably heard of those get rich quick schemes and hyped up stocks in social media, many will try to instill FOMO (Fear Of Missing Out) into your head. This is the last thing you want to do in investing. Not only does it sound like a borderline pump and dump scheme, this also goes back to the first advice: never buy while the market is so bullish.
Turn yourself away from such content in social media and no need to develop ADHD from checking your stock’s performance every now and then daily. This is why research and knowledge is power.
