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What are the Best Tips for Understanding the Stock Market?

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  • Written By: Keith Koons
  • Edited By: Lauren Fritsky
  • Last Modified Date: 01 July 2018
  • Copyright Protected:
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    Conjecture Corporation
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Understanding the stock market may seem like quite a task to the novice investor, but in reality, it is just like any other storefront where items are bought and sold. An actual stock is nothing more than a promissory note that states a business owes the bearer a percentage of the value of the business, and investors are essentially predicting that the business in question will increase in overall value. The actual percentage owed to investors is based on the total number of stocks available, which is why traders normally purchase several notes at a time. The demand for particular stocks also has an effect on the overall market price; if the company is doing particularly well, investors will often pay more than the selling price if long-term forecasts make it appear lucrative. These two principles for understanding the stock market essentially explain why prices are constantly rising and falling.

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Another key to understanding the stock market is knowing when to buy or sell stocks, and experts agree that this topic is almost impossible to predict perfectly. In the span of 24 hours, a single stock may change prices hundreds of times due to consumers trading it. Many investors will make the mistake of delaying a purchase in order to try and shave a few percentage points off of the total price, and this type of logic completely defeats the purpose of a long-term investment. If the stock in question is expected to rise in value, it makes sense to purchase it immediately, since others will likely be doing the same. Understanding the stock market and recognizing the overall demand is a key factor in generating steady profits.

Of course, the sudden surge from many people buying a stock at once will naturally make the price steadily rise, which is what many short-term investors called day traders are hoping for. Their logic is to grab a popular stock well before the majority of the public begins to purchase it and then sell it at a few points higher within hours. Day traders constantly repeat this pattern throughout the day and can sometimes make a small fortune, but they are also just as likely to lose money as well. These types of investors normally devote a massive amount of time to understanding the stock market trends and how to exploit them, and financial experts would never recommend such drastic maneuvers for any investor.

Since there is so much study necessary to fully understand the stock market, it is often a smart move for investors to hire a financial representative on their behalf. These professionals will use a formula to spread the total investment out over several different stocks and bonds, placing the majority into mutual funds that are considered low-risk when it comes to negative growth. The leftover portions will be placed with more aggressive investments that could grow in value quickly, but there is also a potential for serious losses. An alternative for investors that need assistance understanding the stock market would be to pursue mutual funds; these are a pre-selected group of stocks that are designed to provide steady gains with a varying amount of risk involved.

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