Before you invest in the stock market, you must understand what it entails.
You own a part of the business: When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without having to go to work there.
The good news is, since you own part of the company, you are entitled to a share in its profits.
The bad news is that you are also expected to bear the losses, if any.
That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever.
In the short-run, the price of the share can fluctuate: Let’s say the company fixes the price of each share at $10. This is called the face value of the share.
When the share is traded in the stock market, this value may go up or down depending on supply of and demand for the stock.
If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall.
The value of a share in the market at any point of time is called the ‘price of the share’ or the ‘market value of a stock’.
A share with a face value of $10 may be quoted at $15(higher than the face value) or even $9 (lower than the face value).
So you might have paid $15 for a share which is now quoting at $12. Don’t panic and sell. If it is a good company, the share price will eventually rise.
The prices will get influenced by the market sentiment and the general direction of the market. As a result, you may see short-term slumps.
Always invest for the long-term: The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.
That is why you must buy in a bear market. This is a term used to describe the sentiment of
the stock market when it is low and the prices of shares have generally fallen. The best time to sell is in a bull market, when the sentiment is high and the prices of shares are rising.
But it is very difficult to time the market. In fact, no one can do it. If we could, we would all be millionaires, wouldn’t we?
That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them.
Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps.
Once you decide that you are in for the long haul, you can ride over the bear and bull runs with no stress at all. Over time, the price of your shares will appreciate.
If you are getting a good price for your stock, keep selling small amounts at regular intervals.