Wednesday, December 26, 2012

How to Invest in the Stock Market For Dummies

Learn the Stock Market (For Dummies)

I first got a glimpse of how it is to invest in the stock market when I was in my last year in secondary school. We had a subject called Economics, where we studied the laws of supply and demand and practice them through the stock market game play.

PSE.com offers dummies with mock accounts for free. We were required to create an account for each group, where I stood as a leader. I monitored the stock market trends locally and earned millions of pesos from it in weeks. However, since it was only a mock account, I did not earn the real money equivalent of my profits.

Anyway, I grasped a better understanding of the players in the stock market. In this article, I'd like to share it with you.

How to Invest in the Stock Market For Dummies

1. Research of Companies Listed on the Stock Market

No, it is not necessary to study the background and performance of each company listed in public. But you have to know which ones are good performers and those which have the ability to grow in the coming months. These are the companies you'd be eyeing to buy stocks from. By knowing news and the latest happenings about these companies, you will have a better way of predicting their stock prices.

2. Stock Market Trading Sectors

The stock market is built with various companies belonging to 11 sectors. Traders can buy and sell stocks from the following sectors which are further divided into defensive and cyclical:

Defensive Stocks

Defensive stocks are defensive, meaning that they are not affected much by any economic, financial or political crisis in the stock market either negatively or positively. To explain further, when there is an increase in the stock market trend, defensive stocks will remain constant and not be of good profits to you either.

This is because consumers normally cannot live without the products of these sectors. If you're a beginner in the stock market, you must have these in your stocks portfolio.

Defensive stocks are made up of:

  • energy (gas, power and oil)
  • capital goods (manufacturing and aerospace)
  • consumer cyclical (entertainment and automobiles)
  • financial/banking
  • technology
  • communications
  • transportation
  • health care
  • basic raw materials (wood and precious metals)

Cyclical Stocks

On the other hand, cyclical stocks will move you through upward and downward seasonal changes. These stocks have higher volatility compared to defensive stocks. Cyclical sectors include industries of consumer staples such as food and beverages and utilities.

It's not that because defensive stocks are basically safer to keep that you will only invest in defensive stocks and not in cyclical stocks. You should still aim to have a right mix of these different sectors.

To give you a hint, since energy is the largest backbone of our country's progress, investing in the energy sector is much advisable. Still, you have to do your homework in selecting with energy companies to go for when buying stocks.

3. Right Timing: When to Buy and Sell Stocks

Trading is accomplished when you buy and sell stocks. If you have been following the trends in your chosen sectors, you must know if they are performing well recently or poor. The golden rules are: sell those stocks with a downward trend; buy or invest on stocks that are soon/expected to rise.

End Notes

Explore the stock market and get a bigger picture of it before starting to trade. Read news reports pertaining to companies listed on the stock market and make your own notes. Advise of experts of which stocks to buy and sell specifically may not always be correct. So it's no good to don't trust them blindly.