Understanding The Stock Market
by Lance Spicer, 6 Dec 2010, 1:13 PM
Yes! ....You can always make money from the markets
All you have to look for is Explosive Earnings Growth!
Markets go up, and they go down.
I know you’ve probably read all this before and it all seems so elementary, right?
It would appear so, but do you know how many people get this wrong?
Most people, even traders, make this mistake. It’s the reason so many people hate the stock market and prefer property.
Do you know why they prefer property? Because no one comes around to you every day and puts a value on your properties. Imagine if someone were to write about your property every day and then took a consensus of real estate agents and other investors and asked them what your property was worth, every day. You’d swing from elation to depression every 24 hours, your emotions would send you mad! One day your property would be worth 10% more than it was yesterday and you’d be opening the champagne only to pour what was left in your glass back into the bottle the next when you realised you could no longer afford to drink champagne because the price of your investment had fallen again. That’s what happens on the stock market.
The market as a whole, revalues shares every working day.
Now, they revalue the shares based on the information available today, prospects for tomorrow, investment objectives of shareholders and the emotions of millions of investors from around the world….. How can this be an accurate reflection of the value of the company? It’s not. There is no absolute value of anything. It all depends on what someone is willing to pay for it at any given minute of the day. It’s a consensus of value. Just like when you sell your house, you never get what the agents says you’ll get, you always get a different amount simply because there is no absolute value. It’s what people are prepared to pay, at the actual time it is sold.
There is no difference between the property market and the share market. None, they work the same way. It’s just they do valuations at different times. The valuation of a property is done very seldom, where as a share, it’s done every day…. and this freaks some people out.
If you are a good investor, this won’t worry you at all. You will understand that investing should be a medium to long-term procedure. You don’t buy a house and keep it for two months and expect to make money on the deal. You buy it for 2 to 5 years or even longer. Buying a stocks are the same. When you buy shares in a company, you buy the assets and earnings and earnings growth for the next medium to long-term period, and if you buy correctly you’ll make money because you bought cheap and the price rose due to it’s underlying value (there’s that word again) and you sold them high and made a profit.
Think about this…… You buy shares in Australian mining giant BHP Billiton, and you pay $28 per share. The next day they drop to $26. Is the company affected by this price drop in any way? Do they earn less money and have less net assets due to the market perception of the share price? Do some of the mines close, or do the management of the company change the way they are doing things due to the market saying you are worth 8% less than you were yesterday. No, things keep going and the share price is pretty much ignored by the company, the potential profits don’t change, workers keep mining, manager’s keep managing. Life goes on. The share price is merely perception, not reality.
A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street . But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. - Ben Bernanke
Reality is the long-term change in price.
That’s all that matters!
However, investors still get it wrong. They stuff it up. Their emotions get in the way and they lose focus of why they bought the shares in the first place. Never forget why you bought in the first place.
If you do your homework on an investment properly, you’ll always have faith in your decision. The only time to act, is when information comes along, that would have changed your opinion in the first place as to whether to buy or not.
If this information comes your way… Re-evaluate. Then Act.
Now, I’d like to show you a graph of how many investors react to the stock market due to emotional issues (i.e. can’t control them). They buy high and sell low, whereas, the idea is to buy LOW and sell HIGH. Subtle difference I know, but one that makes a big difference to your bank balance.
Now, be honest… who hasn’t had a trade that didn’t go like this…..