Stock Market 101

Online Investing or Gambling ?

Online stock trading - "oh so they have the stock market on computers now"
Online stock trading - "oh so they have the stock market on computers now"
Investing Indecision !
Investing Indecision !

Stocks and Shares Basics

Stock Market Basics

The stock market is a fine way of losing money ! Take it from one who knows. Back in 2000 when the dotcom bubble went ' pop ' we were told that dotcoms were a waste of space and that we should never have invested in them and that it served us right for thinking we could get rich quick from stock trading.

The right thing to do and the thing that the 'experts' were doing was to invest in solid blue chip companies that were making a profit and that paid dividends. Companies like Bank of America, AIG, Lehmans. Bear Sterns, Royal Bank of Scotland, Barclays Bank, USB, etc...

That turned out to be nonsense too, as all of them lost between 90% and 100% of their value and if you had any money invested in them then you were well and truly stuffed! Your investments lost as much as the dotcom rubbish.

Except that since the bottom of the markets back in March 2009 when the S&P famously bottomed out at 666, the markets have turned around and gone back up. So you only lost your money if you sold out at the bottom, or if you gave it all to Bernie Madoff. Those who held their nerve have made their money back and more, as the stock markets are now at all time highs again!

As Warren Buffett says - "the stock market is a means for transferring money from the impatient to the patient"! That's easy to say of course if you can afford to ride out the storm, and it's worth bearing in mind that a lot of small investors lost a lot of money back in 2008 and 2009 as they couldn't afford to sit tight and see their savings disappear.

Basics of Charting

Even legendary investor Warren Buffet lost over $20 billion dollars in a year - that takes some doing for the smartest investor on the planet. He also admitted that he made some mistakes back in 2008, like buying unnamed Irish banks that lost 83% of their value.

The moral of the story is that no-one knows what they're doing - the stock market is according to some basically a giant Ponzi scheme which works as long as it works and no-one finds out that the emperor has no clothes, but once things start to fall apart it is like the famous domino theory the USA was so worried about in Vietnam back in the '60s. One domino fell and brought down all the others. Or as Warren Buffett puts it "when the tide goes out you find out who is wearing no shorts". Since the crash the stock market has been held up by the FED printing money in the form of quantitative easing. The economy has still not recovered, and it will be interesting to see what happens when the FED does finally stop printing money and starts raising interest rates again, which will probably happen in early 2015.

Back in 2008, as the dominoes fell they first revealed the incompetents and then the crooks like Bernie Madoff and Allen Stanford (allegedly) and others. The crooks have caused a lot of people to lose a lot of money but they did not cause the crisis and they are a mere drop in the ocean of the trillions that have disappeared.

Where are the Stock Markets Headed?


Stock Market Basics

So what next ? The DOW fell from over 14,000 to under 7,000 in just over a year, but then started an almighty bounce, much to the surprise of many!

One person who gets his predictions right more than he gets them wrong is Oscar at Live With Oscar - he puts his videos up on youtube for everyone to see free of charge. He was been negative starting in October 2007, but became bullish again back in 2009 and is currently still bullish, despite markets being at their all time highs.

Because the stock market is a great way of losing money it is also a great way of making money, and when it turned it turned out to be an excellent opportunity for some people (mainly professional investors) to make some serious money. Timing is everything of course !

The DOW turned in March 2009 and has not looked back since! But at some point it will, so take care !

The golden rule of course is not to invest what you can't afford to lose. Trying to second guess the markets is notoriously difficult for amateur investors and traders. So another golden rule is to have a stop loss! A stop loss is a point at which you automatically sell your investments if they fall by a certain amount (this applies to traders rather than to long-term investors). The amount most people set their stop losses at is around 5%. So if the stocks you have bought fall back 5% from their high point, or the point at which you bought them, then you should sell up and look for something else! You have a lost a battle but not the war!

It is important to understand that you can't get it right all the time. Some of your traders will turn out to be mistakes and you need to accept this fact and cut your losses. When trading stocks, traders try to limit their losses on any single trade to around 4 or 5% and try to make around 10% on any winning trade. By doing this they are controlling their risk/reward ratio. To many people make the mistake of hanging on to their losers, despite the evidence that is staring them in the face, in the hope of making back the money they have lost on the same share! It is a better idea to try and make back the money you have lost on a different share! One that is going up not down!

So that is why traders will cut their losses and move on to another trade.

This only applies to traders, however, who use charts to try and time their trades. Long-term investors are much less interested in charts, as they base their investment decisions on 'fundamentals' i.e. how sound a company is and how good its profits are etc... this is what Warren Buffett does, but it does involve a lot of work and a good understanding of company accounts (and of course a certain amount of trust in the honesty of these accounts).


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Comments 39 comments

Stock Market 5 years ago

very good post, i was really searching for this topic as i wanted this topic to understand completely and it is also very rare in internet that is why it was very difficult to understand

thank you for sharing this.

Regard

Stock Market


james moylan 5 years ago

I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about financial stocks like bank of america and citi group among others. I have never invested in financial stocks banks insurance companies other financial stocks. I do not consider financial stocks to be real companies when you pay your car insurance for example the money goes in on one end and comes out the other end in the form of a payment for damage done to your car in an accident the money is simply being recycled their is no real product or service being created here just money being recycled.


Singular Investor profile image

Singular Investor 5 years ago from Oxford Author

It sounds like you know what you are doing and do a lot of research into companies before investing in them, somewhat in the manner of Warren Buffett although he does go for big names a lot of the time


GBeckhamfan 5 years ago

I don't personally give stock market tips. I read the Motley Fool books and do all my research on my own and base everything I buy on the numbers of the company. I don't blindly listen to what anyone recommends no matter how much of an "expert" they are. I tend to stay away from the major companies, although I do have some investments in BofA and Citi, 75% of my portfolio I would bet most people have never heard of.


Singular Investor profile image

Singular Investor 5 years ago from Oxford Author

Hi GB - thanks for dropping by - I do know a bit about the stock market but am keeping out still at the moment -good to hear you bounced back - got any tips for 2011 ?


GBeckhamfan 5 years ago

It sounds like you know quite a bit about investing and the stock market and have done a lot of research since you lost after the market tanked. I invest whatever I can and had a time when I was down quite a bit, mostly on one stock, but have bounced back recently. Great Hub!


Singular Investor profile image

Singular Investor 5 years ago from Oxford Author

Thanks Iam - good luck with your stock market investing - not sure what 2011 will bring, but here are some newspaper share tips I found for those looking for stocks to invest in for 2011 - http://www.sharescity.com/2011/01/investors-chroni...


iamageniuster profile image

iamageniuster 5 years ago

Awesome post. I invest in the stock market. It's a great investment.


Singular Investor profile image

Singular Investor 6 years ago from Oxford Author

Dablufox - you are right about low stock prices of course, for example Warren Buffett likes good companies at reasonable prices for his long-term investments, - you can see his latest stock picks here - http://www.theoracleofomaha.com/2010/11/warren-buf... - he also bought a whole load of stocks back in October 2008 as he reckoned the stock market was finally cheap enough to buy, he has been proved right again since. If the stock market is at new highs don't get depressed - consider shorting stocks as an alternative ! If the prices fall back you make money that way. Thanks for the comment and the insights.


dablufox profile image

dablufox 6 years ago from Australia

I think stock price is only half the equation.

If your a long term investor you want the share market to fall so then you can purchase more stock, therefore you get purchase a better return for your money because the income yield will be higher.

I actually get depressed when the share market reaches new highs because it is less worthwhile to invest.

As long as you invest in solid company's which have consistent profits, you really want low stock prices.


Singular Investor profile image

Singular Investor 6 years ago from Oxford Author

We WILL get a double dip and it is NOT priced in all IMHO of course :-)

Thanks for the comment oib - good luck with your stock trading too !


online investing for beginners 6 years ago

Excellent hubpage for beginners to stock investing - good luck with the stock trading !


financial spread betting 6 years ago

Will we get a double dip? If yes is it already priced in?


Singular Investor profile image

Singular Investor 6 years ago from Oxford Author

Hi LasanthaW thanks for the comment - it's true there is risk involved and if you are a trader then certainly you need to watch the stock market very closely, I recently saw a stock drop 60% in 2 hours then recover it all back again in the next 2 hours ! Certainly if you had had some insider knowledge of that particular stock you could have made a small fortune. So it can be a wild ride. I'm more and kore coming to the conclusion that long-term investing is a much less stressful way of investing like Warren Buffet - but you do need to be able to analyze companies carefully, unless of course you just follow what Warren Buffet does, which is also possible as he publishes all his trades eventually - http://www.theoracleofomaha.com


LasanthaW profile image

LasanthaW 6 years ago from Sri Lanka

When you do stock market transactions you need to take some risk. The most important thing is that you must carefully moniter the market activities and take quick actions whenever necessary. You also need some insider knowledge without which it is difficult to gain much from stock market transactions.


Singular Investor profile image

Singular Investor 6 years ago from Oxford Author

Yeah the stock market is my favorite place - they've got it on the Internet now too !


Stock Trading for Beginners 6 years ago

Nice explanation Homer ! I had no idea you were interested in the stock market !


Singular Investor profile image

Singular Investor 6 years ago from Oxford Author

Mitch - yes you are right - the stock market is where the money is at - but it does seem to be biased in favor of those on the inside


Mitch King profile image

Mitch King 6 years ago from Wilsoville, OR, USA

The stock market can be an amazing place to make some money for those who are willing to take a few risks. Of course everyone should know what they are getting into and know even the fundamentals of the stock market.


Singular Investor profile image

Singular Investor 6 years ago from Oxford Author

Hi Scheng, yes you are right, the purpose of the stockmarket is to match investors with companies, but ever since its beginning people have been gambling and taking bets, and indeed selling stock in companies that they knew were worthless to people who didn't have access to the same information. So unfortunately the stockmarket is used by many people like a casino, there are exceptions of course, such as long-term investors like Warren Buffett (those interested can see - http://www.theoracleofomaha.com) but I think 90% of people just see the stockmarket as a way to make, or lose, a quick buck.


scheng1 6 years ago

The whole purpose of stock market is to match investors to companies which need cash to grow.

It is not meant for gambling or for those without understanding of business.


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Well done - making money on the stock market is not easy ! Except at the moment of course as it seems to go up every day - for info. on Warren Buffett see http://www.theoracleofomaha.com


stock assault 7 years ago

I made 1000% on my December 3000 ASX200 put options. I'm loving it.

Next on the list is the greatest depression. Good luck boys and girls.


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Hi KZ thanks for dropping by - nice looking stock market for beginners blog you got their ! I've got a site about online stock trading for beginners myself but not so well-developed ! http://www.onlinestocktradingforbeginners.com/


stock market for beginners 7 years ago

excellent article, the charting vid was great :) will be pointing visitors to it!


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Hi Douglas - thanks for dropping by ! Interesting hub you've got too.


Douglas45 profile image

Douglas45 7 years ago from Winston-Salem, NC

Great Hub. Nice to know a fellow investor with a sense of humor...


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Hi PS

Thanks for dropping by, but that's not what I said - but I did say that people can lose a lot of money on the stock market


Penny-Stocks 7 years ago

Companies like Google started off as a small penny stock company, therefore it is not right to say that stock market is only for those who love to loose their investment.


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Thanks - will do


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Yes, it's all relative but I guess he can scrape by on his $40 billion. At the moment it is his reputation that has suffered more although I'm sure over time people will see that he made the right decision, although he could have waited 6 months.His biggest mistake he says was buying Conoco Philips oil stocks when oil was at $147 a barrel.


tdarby profile image

tdarby 7 years ago

Thanks for the refresher, I knew Buffet had lost a lot but $20 billion. I guess that puts my measly little losses into perspective.


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Thanks Sophie - good pic !


sophiewf profile image

sophiewf 7 years ago from US

good article


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

I'll let you all know right after I've filled my boots !


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

I'll let you all know right after I've filled my boots !


Ralph Deeds profile image

Ralph Deeds 7 years ago

Let us know when the timing is right!


Singular Investor profile image

Singular Investor 7 years ago from Oxford Author

Lol - unfortunately it may go down quite a way before it goes back up again - I prefer to be cautious with the few pennies I've got left - but eventually yes it will make sense to get back in


Ralph Deeds profile image

Ralph Deeds 7 years ago

Don't lose faith now! There's only one way to go -UP!

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