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How to Start Investing in the Stock Market

How to start investing in the stock market is to start with basic principles. How much do you have to invest? A good rule of thumb is that you should not invest what you cannot afford to lose. Thus you need to be able to pay your mortgage or your rent and make payments on your car and other expenses. Then you should have a couple of months of expenses in the bank and your credit cards paid off. That is how to start investing in the stock market. While you are getting things in order you will need to decide if you are investing for the long term such as retirement or you child’s college education or for a short term of a few months or a year. To what degree you rely on fundamental analysis of stocks versus technical analysis of market movement will depend heavily on your investment time horizon.

Picking new winners in today’s stock market takes a degree of expertise that is more dependent upon hard work and patience than upon mental brilliance. How to start investing in the stock market for the longer term is to familiarize yourself with the principles of intrinsic stock value and a margin of safety. These principles have been around since the 1930’s and are the corner stones of value investing. Long term investors will look for stocks that are underpriced when one considers their forward looking earnings potential. They will also look for companies that have hard assets that will act as a cushion during tough economic times. In looking for attractive stocks an investor may find himself investing in oil, investing in beer stocks, or choosing dividend stocks. The unifying principle will be that the stock has a reasonably low price to earnings ratio and strong prospects for a continued and increasing income stream.

How to start investing in the stock market for the short term still requires knowledge of stock fundamentals but it also means that you will need to learn technical analysis of stocks as well. Investors are always buying and selling stock based upon their estimates of the stock’s future earnings and future value. Thus the price of a stock will vary with market sentiment which may or may not turn out to be correct as to the long term stock price. The tools needed to anticipate price movement in the shorter term are heavily weighted toward statistics but can be learned by any short term investor. We are not talking about being a day trader and buying and selling the same stock several times a day. However, how to start investing in the stock market for the short term requires an ability to buy a stock near the bottom of a trend or cycle and sell when it has outgrown its potential. In picking different types of stock the short term investor will be less concerned with balancing a portfolio than with picking stocks with good short term earnings potential. Investing in growing companies is typically a good strategy but the investor needs to buy before market sentiment drives the price too high. A dispassionate approach to both short and long term investing works the best. Don’t get carried away with market psychology and don’t let fear and greed drive your decisions to buy or sell stock.

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