The current inflation is yet another reason causing people to look for ways of efficiently increasing their capital. As interest rates are low, traditional savings accounts don’t really do anything for investors anymore – to many, the stock market seems to be the perfect alternative. It promises high returns, but also bears risks. Experienced stock market investors know what to pay attention to, but beginners should not be starry-eyed: It takes preparation and know-how to become successful in investing in financial assets.
What Is the Stock Market?
Stocks or equities can be understood as securities that shareholders receive in exchange for their investment in a public company. The more shares of a company you hold, the more influence you have, as stocks are real stakes. Most private investors don’t buy stocks in order to have an impact on the company, however, but rather to benefit from a good company performance – shared risk also means shared profits.
As businesses issue stock in order to receive fresh capital, they also have to share returns. Stocks can be issued and purchased on the stock market or the so-called stock exchange. The stock market can be understood as all stocks in a market as a whole. If “the market is up”, it usually means that the overall market is performing well – there might still be single assets that don´t, though. Around the globe, there are various markets, such as the Dow Jones, the German DAX or the London Stock Exchange (LSE).
How the Stock Market Works
Every stock market works the same way. There is an offer of stock on one side, and a demand for stock on the other side. Issuing companies create the offer. Investors create the demand. Just like in other fields of the economy, it’s the proportion of demand and offer that creates the price.
Investors usually try to buy when prices are down. That way, they can benefit from an upcoming upward trend. As the value of a company rises, so does the value of its shares. If investors sell their shares when prices are up, the difference between the purchasing price and the selling price equals the yield.
That means that stock investments are lucrative if the bought stocks perform well. During an economic crisis, it can be hard to find assets that really do perform well. Binary options trading can be a profitable alternative in that case, as they´re not dependent on upward trends.
Risks and Benefits of Investing in Stocks
By issuing stocks, companies technically onboard investors. That means that investors can benefit from a share price increase. But, of course, they also take the risk of losing money in the case of a drop. In case of an ongoing financial crisis, selling stocks usually comes with financial loss. That’s because the overall demand of assets is lower than during an uptime.
Technically, temporary slumps and price adjustments don´t harm investors, but equities can still be a great way of saving for your future. But it´s during downtimes that many investors become nervous about their capital and start panic-selling. The more investors sell their company shares, the bigger the price drop – a downward spiral begins.
Investing in the Stock Market for Beginners
Investors that are new to the stock market should prepare themselves well by learning about the market, about the stock exchange and about economic correlations. It’s important to have good knowledge about branches and companies that you’d like to invest in – only then will you be able to make a prognosis on how the price will possibly develop in the future.
Beware that stocks are volatile – it´s in their nature to underlie price fluctuations. It takes a cool head in order to sit those fluctuations out without panicking. In order to trade successfully, also make sure to educate yourself on trading styles and strategies. A set strategy will help you stick with your trading style and will pay out in the long-run. Also, make sure to keep the following tips in mind before your first investment:
Avoid Individual Stocks
Individual stocks can offer high profits, but they also bear risks. That’s why diversification is so important. If one of the stocks in your portfolio does not perform well, winnings from other stocks can compensate for the loss and even keep your entire portfolio in plus. When investing in the stock market, success usually depends on resilience rather than on daredevilry. If you´re unsure about what you want to invest in, ETFs can be a good alternative, as they reflect entire indices instead of just single companies.
Always Be Prepared for a Downturn
There are so many things that have an influence on the stock market. It’s hard to keep track of all the relevant correlations even for stock market experts – left alone for beginners. That’s why it’s crucial to prepare yourself for a downturn – they are part of the volatile market. Fluctuations and downturns in particular aren’t for everybody, because it takes a cool head to overcome them without panic-selling. Trying a stock market simulator can help you practise staying calm through a storm and they’re also good for working on your investment strategies.