Hello my fellow readers! In yet another of my investment hubs, I will be educating my dear readers and this time specially for beginers how to get into stock market investing! Yes this hub is for beginner stock market investing and will teach beginners how to buy stocks and shares online and at the best prices!

The stock market is a very irrational creature and stock prices usually fluctuate up and down. Many people are mystified when is the best time to buy or sell stocks. So if you are a beginner in stock market investing and you are interested to know more about beginner stock trading, or looking for some stock trading tips for beginners, my Beginner Stock Market Investing hub is the best place to be! Read this hub and I will guarantee that you will be laughing all the way to the bank!

I am very sure that as a Beginner, you know nuts about stock market investing. Never fear, because in my Beginner Stock Market Investing Hub, I will teach all you beginners here the birds and the bees about stock market investing and stock trading starting from the basics! This hub of mine would basically be talking about two parts. I will first talk about how stock prices can be influenced by the environment and the economy. This will allow beginners to understand what causes the changes to stock markets and prices of stocks and shares and hence let you beginners make you more knowledgable when analysing the market. For the scecond portion, I will talk about how stocks and shares are valued and how we can best predict the prices of stocks and shares of the company in the future! Sounds interesting right? Just read on!

Now that you roughly know what monetary policies and money supply may affect your stock market investing, let us look at the findings of some of the studies conducted to find out how monetary policies correlate to stock market movements. Numerous studies have been done in the US on the Fed policy on stock returns. In one study, Conover, Jensen, Johnson and Mercer concluded that:

1. Monetary conditions have had and continue to have a strong relationship with security returns. Periods of expansive monetary policy are associated with strong stock performance (higher than average returns and lower than average risks) whereas periods of restrictive monetary policy generally coincide with weaker stock performance.
2. A highly consistent relationship between monetary conditions and stock returns is evident over time.
3. Small cap companies are more sensitive than large cap companies to changes in monetary conditions. Portfolios of small cap stocks have economically and statistically significant monetary policy-related return patterns that are consistent over time.
4. Cyclical stocks have a much higher sensitivity to changes in monetary conditions than defensive stocks. To illustrate this point, stocks in the cyclical consumer goods, cyclical financial services and information technology sectors had expansive-period returns that were more than 26 percentage points higher a year than the returns they earned during restrictive periods.
5. US monetary policy has an important influence on global markets They found significant return patterns related to US monetary policy for five international indices, including Asia. This evidence is consistent with the prominent role US economic conditions play in the prospects of foreign companies.

To summarise, beginners investing in the stock market should pay close attention to the monetary conditions when they are researching and analysing the economy and prices of stocks and shares. As sensitivity to changes in the monetary conditions deviate considerably among sectors, a stock market investor newbie must look closely at the different sectors and industries before making a decision. Stock market Investing Beginners who are attempting a sector or industry rotation strategy should carefully monitor changes in the monetary policy, before buying any stocks or shares in the stock market.

The National Bureau of Economic Research (NBER) in the US has evidence which shows that there is a link between the prices of stocks and shares and economic behaviour. This link is strong, and stock prices consistently turn before the economy does. Based on several studies, the stock market is found to lead the actual economy by some four months. Returns from the stock market will peak first, before the real economy. A strong stock market performance would mean strong economic growth.

There are 2 possible reasons why stock prices can lead the economy. One is that stock prices reflect expectations of earnings, dividends and interest rates. Investors will thus attempt to estimate these future variables and price stocks according to expected future economic activity, and not on current activity.

Another possible reason would be that the stock market reacts to various leading indicators. Among the most important indicators are interest rates and changes in the growth of money supply. Because these series tend to lead the economy, when investors adjust stock prices to reflect expectations for these leading economic series, it makes stock prices a leading series as well.

Studies have shown that growth in industrial production can also explain stock market returns. However, the stock market also moves ahead of industrial production. This explains why sometimes the announcement of great growths in industrial production does not create any movements to the stock markets. Only when the figure differs greatly from what the market expected, will the announcement have major impact on stock prices. This also applies to export figures; stock prices tend to lead growth in exports.

For beginners in stock market investing, if you are looking for indicators that lead the stock market, there are three known indicators.

1. According to NBER in the US, the index for raw private housing units authorised by local building permits leads the actual economy by seven months. Since stock prices lead the real economic activity by four months, then the private housing index should lead the stock market by three months.
2. M2 money supply is also known to lead the US stock markets by one month. If you do not know what is M2 money supply please scroll up and read the hub carefully!
3. The last indicator is the changes in business and consumer credit outstanding.

The problem is that this one month lead time is really too short to be used to predict the stock market. One would thus not be unable to find an indicator that precedes the up and down of the stock market and which is available to consumers in a timely manner. Therefore, we go back to square one which is why it is impossible to predict the market. Therefore, I urge all who wish to do some beginner stock market investing that you should not try to time the market!

Having said that please do not despair. While it is impossible to know with one hundred per cent certainty that the market has peaked or bottomed, there are ways in which we can find out which part of the cycle the market is currently at. The following are some of the ways that you can find out the cycle in which the stock market is currently at and based on this information do some stock market investing:

1. The price earnings ratio of stocks and shares. When most stocks are trading at 30 or 40 times their expected earnings, it is best not to buy those stocks!
2.  The movement of interest rates.
3. An overheated market for initial public offers is also sign that a stock market has peaked.
4. Another sign includes those from the news and the conversations of people. If you keep on hearing people say that they have bought XXX stocks and shares and the stock is still rising, and this applies to non-savvy investor folk, most likely the market is being pushed to its peak by the general public and would not be able to sustain its momentum for long. If everybody seems to be bullish, it is time to put on your contrarian thinking hat and start selling instead of buying, before the big sell-off comes about. This is really what all beginner stock market investors should know to invest in stock markets - do not just follow the crowd!

An Introduction to Monetary Policies

Since you are a beginner looking for information on stock market investing, I am sure you have no idea that the prices of stocks and shares can be affected by monetary policies set by the central bank or monetary authority. Before I go into detail how monetary policies can affect the prices of stocks and shares and hence affect how you as a beginner will invest in the stock market, let me first explain the different types of monetary policies.

Monetary policies can be easily classified into three types:

1. Expansionary Monetary Policy. This occurs when the central bank or monetary authority acts to increase the level of reserves in the banking system. This is to allow a higher growth rate of money supply to stimulate the economy or to sustain a current level of economic activity that is believed to be non-inflationary.
2. Neutral Monetary Policy. The central bank or monetary authority takes a neutral stance which is to hold the level of reserves at a constant level.
3. Restrictive Monetary Policy. This is the opposite of an expansionary policy and the central bank or monetary authority acts to decrease the level of reserves in the banking system. In such a case, the central bank or monetary authority’s objective is to lower economic activity in order to curb inflation.

Whether the central bank or monetary authority is pursuing an expansionary, neutral or restrictive monetary policy at a given time can be determined by the money supply in the economy, interest rates, bank reserves and the central’s open market operations, that is buying or selling government securities in the open market.

How Does Money Supply Affect Stock Prices

Monetary policies influence money supply in the economy and hence influences how you as an investor carry out your beginner stock market investing! Let me thus talk more about money supply in the economy now. Money supply can be measured in several ways. Narrow money supply or M1 includes currency and demand deposits. M1 money supply plus time deposits is referred to the M2 money supply.

The stock market tends to rise when the M1 is on the rise year-on-year. When the growth is slowing, or worse when M1 contracts compared with a year ago, you should be wary of equities. There is actually a high correlation between M1 and the stock market. The influence of money supply is also greater on stocks of smaller companies than on blue chip stocks.

Dear beginner, you are almost on your way to do some serious stock market investing! One last piece of knowledge that I wish to impart to you is to teach you how to predict the future performance of a stock. If you are looking at how to predict the future performance of a stock, you might want to look at the price-to-book (PTB) ratio, price earnings ratio (PE) or dividend yield.

The price-to-book (PTB) ratio is the ratio of a company’s market capitalisation over its equities as recorded in its books. The equity number is derived by deducting debts from the company’s total assets (at the time they were purchased net of depreciation and impairment of value). It is possible to use the PTB of a company to predict its future stock performance. The use of the PTB ratio has more predictive power than the earnings growth, price/earnings or volatility.

Studies have been conducted by Eugene Fama and Kenneth French which shows that the lower a company’s PTB ratio, the higher its subsequent stock performance would tend to be. In addition, most of the sharp rebounds in low PTB stocks occur during a market recovery. However, there is a problem. Most of these low PTB stocks tend to be rather illiquid and many investors hesitate and really overthink if they would want to buy these low PTB stocks.

Some investors use the adjusted book value of companies to value such stocks. This asset based valuation model assigns value to a company by aggregating the current market value of its individual component assets and liabilities. Some other investors rely on unadjusted book values as they are easier to obtain. However an assumption has to be used here, that is the historical cost-based book value reflects the minimum value of the company.

In summary, the book value is viewed as a conservative estimate of a company’s value. The crux is how close the market value or stock price of the company is to the book value. If it is very close to the book value of even below the book value, then this signals that the stock should be bought because there is less downside risk. However in spite of the above, some stocks do trade persistently below their book values because they are not able to grow their equity at a rate higher than their cost of their equity. Or sometimes, losses may have been made.

As for price earnings ratio (PE), make sure that the stock has a low price earnings ratio and for dividend yield make sure it is as high as possible!

If you find reading all the information above as a chore, there is one take home message that you might want to take note of here: When the whole market is trading at a PTB of below one, it is a strong signal that stocks in general are undervalued. And that means you can buy those stocks. Happy buying! Stay tuned till next time when I bring you more information for 

Beginner Stock Market Investing!