In all financial markets, stocks are popular among investors. Investors can make
and also lose a lot of money in the stockmarket. Stocks can be volatile investments
as prices can move up or down over short periods. Are stocks good investments then?
Historically, there have been booms and busts, but the very long-term trend has been
growth. To many fund managers, stocks are part and parcel of their portfolios for
long-term capital growth.
Although it seems to be electrifying to trade in the local stockmarket, you must
not forget the level of risk involved. The on-going market turbulence should be taken
as a good example. You should learn how to overcome your own weaknesses at least
to prevent greater losses from the short-term market volatility.
The current stockmarket crisis has adverse effects on many stock players. For some
personal investors, the current low prices of stocks may provide interesting opportunities
for long-term stock buying. For others, they may prefer to stay out until the market
The winning strategy is to buy low and sell high. But how many times in the past
did investors actually hit it right?
Trying to identify the bottom of a market that is beset by negative sentiment is
always a difficult task but if you are long-term, you may try to selectively pick
some good blue chips supported by sound fundamentals for your portfolio when the
market recovers ultimately.
This however, should not suggest that investing in blue chips do not involve risk
at all as compared to other type of stocks such as the small capitalized stocks.
Generally, stocks with sound fundamentals receive greater attention and will likely
recover relatively faster than others.
Whether investors buy or sell, depends on their conclusions on various economic considerations.
Economic factors such as interest rates, inflation, unemployment rate, affect stock
prices. Do not forget the political risk as well.
For example, high inflation normally brings down stock prices as higher cost of labor
and materials reduce the profit margins of the companies, thus lower stock prices.
High unemployment rates which normally point to a slowing economic growth usually
affect stock prices negatively. Other considerations which normally affect stock
price movements are industry and company factors.
Studying the various factors affecting companies, industries and economy as a whole
can help you to manage your stock investments better. Fundamental analysis is widely
used by stock investors for stock screening. It involves studying factors such as
the earnings per share, price/earnings ratios, and dividend yields of the companies.
On the other hand, technical analysis is also popular for some investors. It basically
deals with charts and does not consider factors such as company earnings and quality
of the management.
In short, chartists look out for particular patterns for buy or sell signals such
as head and shoulders or double bottoms.
If you borrow to invest in stocks (also called gearing), your risks are likely to
be amplified although it is equally true that the gains are multiplied especially
during good times.