Investing in the stock market has evolved from being a chic indulgence for financial gurus on Wall Street to a key necessity for Americans. It is no longer a trade that is hashed out on mahogany round tables by billionaires and millionaires. Everyone is doing it; from the executive who is driving a Rolls Royce on Wall Street, to the small business owner on Main Street and even the cab driver in Salt Lake City. In view of this robust growth of stock market investing, fresh investors need to get a hang of some of the unwritten, yet critically important rules in Wall Street.
This article is set on unearthing three key rules to stock market investing; rules that will give beginners a launch pad to success in the stock market.
Outline your needs and stick by them
Before dolling out your hard earned money to hedge funds and asset managers, it is very crucial that you first analyze yourself and outline your needs. Do you want your money to potentially grow astronomically or do you want a secure place to put your money and rake in a reasonable income at the same time.
By knowing your needs, you will be able to single out the right stocks for you. Income oriented investors typically stick to non-volatile stocks that reward shareholders with ever-increasing dividend yields. Growth oriented investors on the other hand love volatile stocks; stocks that can post double digit growth overnight.
Once you know what you want, it will be easier to make better decisions on your stock picks.
Don’t blindly follow the ‘buy low sell high’ concept
‘Buy low sell high’; this is arguably the oldest and most commonly used phrase in stock market investing. In fact, very many renowned investors, including billionaire Warren Buffet, have made billions on this concept. Nonetheless, is it always true? No, it doesn’t always hold. In some cases, it is unjustifiably inaccurate.
Damaged company vs. damaged stock
The buy low sell high concept only works with damaged stocks. Take a look at tech big wig Apple. For the past six months its stock has been battered by analysts on reports of thinning demand for its popular iPhone. In the process, it share price fell from the $700 neighborhood to lows of around $390. As of this writing however, the stock has trended upward, albeit slowly, and now trades at around $450. The shareholder who bought it at $390 is certainly making some money. This is a perfect case of a shareholder who bought a damaged stock at a low price.
However, there are some investors who literally chase after cheap stocks without understanding the drivers behind the cheap price. They buy low and end up being burnt. These are investors who close in on damaged companies. There is a clear line of distinction between a damaged company and a damaged stock. While the latter’s bad performance is brought about by macro factors or thinning sales, a damaged company is in most cases riddled with federal investigations, executive exodus and workers strikes. Both damaged stocks and damaged companies are cheap; just make sure you buy the right one.
Analysts are not always right, do your own research
Wall Street greatly depends on recommendations presented by sell side analysts. But are they always right? A recent study by NerdWallet suggests otherwise. The findings of the study conclude that 49% of analysts’ ratings on the Dow 30 in 2012 were inaccurate. Worse still, analysts had an undisguised slant toward the buy recommendation. The study argues that 62% of all ratings were buy recommendations; making up 85% of all accurate ratings.
Are analysts afraid of giving a sell recommendation? The possibility cannot be ruled out, especially after retrospectively looking at the case of one-time star pharmaceutical analyst for Bank of America David Maris.
After issuing a sell recommendation on Canadian drug company Biovail (a rating that was years later found to be justified and accurate), Maris was sued. His career went south and he spent almost a whole decade in and out of court for being a whistle blower. In view of this, most analysts would rather take up a conservative stance on sell recommendations.
Bearing in mind that most analysts advice investors to buy, it is very important to do your own research. Thereafter, you can couple your research findings with insights from different analysts.