Stock Market Investment Advice
From Adviceopedia
Before parting with your money, stock market investment advice can make the difference between throwing away your investment and increasing it.
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Stock Market Investment Advice
The stock market is a place where individual and institutional investors can make—or lose—a fortune. Success is driven by your knowledge, your research skills, your sense of timing, your risk tolerance, and, to some extent, your luck.
Types of Stocks
Stocks come in two kinds, common and preferred.
- Common stocks have voting rights in the company and receive dividends.
- Preferred stocks do not have voting rights but do receive the first dividends in a distribution, so provide more consistent returns. Not all companies issue preferred stock.
Stock Sectors
Stocks belong to one of eleven sectors. These sectors divide stocks into categories so you can compare one stock's performance to its peers. You can also compare stocks to stock indexes such as the S&P 500, but sector comparisons are the most common.
Consumer staples and utilities are called “defensive” sectors because they represent constant in-demand industries. It's usually best to invest in a sector whose ups and downs you can understand and where you can use stock market investment advice combined with your own analysis. The others are called cyclical sectors because demand and prices are more subject to the many economic cycles affecting stock prices.
- Consumer staples
- Communications
- Consumer cyclical
- Basic materials
- Capital goods
- Energy
- Financial
- Health Care
- Technology
- Transportation
- Utilities
Stock Indexes
The Dow Jones Industrial Index is the group of 30 of the biggest stocks that are used as indicators of the overall health of the stock market. The S&P 500 is a wider group of stocks and so provide a more diversified picture of its directions. The NASDAQ consists of all 5,000 or so stocks traded on the NASDAQ, which means that it's heavy on the performance of technology stocks. Stock market investors also measure stock performance against these.
Elements of Stock Performance
Stock values depend primarily on earnings and growth, both past performance and how investors think they will perform in the future. What stocks you pick depend on many factors, but these are the essential elements.
Tools to measure performance include:
- Price to earnings ratio. This is the most common measure and measures the ratio of company revenue per share to the price of the stock. (Total revenue/number of shares: Stock price)
- Projected earnings growth. How much are the earnings likely to be in the future?
- Price to sales. This is the ratio of the company's total sales to the stock price. This is a better measure for established stocks in fairly predictable markets, since newer companies might just be getting started in sales, and in fast moving sectors like technology or medicine, a breakthrough, either from the company or its competitors, might be around the corner and not yet reflected in its sales.
- Dividend yield. How much does a stock cost measured against the dividends it pays? If you're investing to supplement your income, dividends are more important than long term growth of the stock value.
- Book value. This is the total company assets minus its total liabilities. This works well for companies that have most of their value in assets such as property or patents, less well for ones where its value is its internal expertise, such as a consulting firm.
Practicing and Stock Market Investment Advice
Beginning investors can practice their techniques against the stock market by using fake money. Investopedia has a fairly comprehensive system and is part of a website with other stock market investment advice and information.
You can also get recent information and even analyst recommendations at Yahoo!Finance and Reuters.
Day Trading
Day trading isn't always the road to fast riches or fast ruin that all the dramatic stories would have you believe, but it can be risky, especially if you invest on margin (essentially borrowing money from your brokerage firm to invest).
