The stock market comprises of a collection of various markets and exchanges under which the activities of purchasing, selling, and insurance of shares is undertaken for companies that are publicly held. This financial activity is conducted under the regulations that are laid across in a defined set.
The stock market is indeed a complex web, and a novice investor can easily get tangled in it. From being bombarded with unending information of the different stocks to figuring the flow of the trading day, understanding the basics can be tough. Thus, big investments are particularly not well-suited for people who do not have the slightest understanding of the fluctuations in the market. Here’s a basic understanding of the stock market world and its functions.
Why are there fluctuations in the stock market?
There are complicated reasons behind the rise and fall in numbers, and one must be sure about the worth of a company when making a purchase. It comes down to the basics of the market’s supply and demand. When there is demand for a given stock and the ability to meet the demand is low, the value of the stock will move up. However, if there is low demand for a stock and the stock is available in high supply, the price of the stock will drop. Moving forward, there are also global factors that impact the cost of stocks, followed by the position of the company in the market.
- Diversity is key
While the likes of Buffet and Andrew Carnegie may be known to put all their eggs into one basket and watch the basket closely, it is not a recommended strategy for a beginner. In the beginning, it is best to diversify exposure to minimize risk. This means that a single bad event will not put a very hard strain on the holdings.
- Valuation of a stock
The value of a stock is defined by the activity in the market at the time of a transaction. When buying or selling a stock, the investor must evaluate by comparing the cost at that point with the fair value of the stock. If the stock is trading at a cost below its fair value, it is worth purchasing. On the other hand, if the stock is trading at a price that is greater than its actual value, it may be wise to avoid purchasing it.
- There may be a crash – but hold on
The stock market is extremely unpredictable, and there are times when it will crash. It is, of course, disturbing to watch the portfolio shrink in value and not be able to control the same. However, it is best to stay put when making a long-term investment. Pulling out one’s money may be the first thought that comes to mind, but portfolios rebound from the bottom too. Thus, most experts recommend waiting years when dealing in the stock market as selling investments in a downturn can lead to losses.
Getting well acquainted with the working of the financial scenario, and the stock market particularly, can take several years. However, that should not deter one from taking the step forward and exploring this unfamiliar territory.