Investing or speculating
Before buying stock, it is important to distinguish between investing in the stock market and speculating in the stock market. Buying stock is a fairly simple task but actually making money in the stock market is harder than it looks without some experience and guidance.
Make sure to have a clear idea of what your investment objective is before buying the first share of any company trading in the stock market. When you make equity investments you are purchasing an asset in order to realize a profit through both price appreciation and/or dividends over the time you hold the stock. The key for most investors is to have a long term perspective.
The main difference between investing and speculating is the time period involved. As an investor you are investing in a company because you value that company and believe that over the long term it will maintain or increase it’s competitive advantage and provide good returns to the owners. On the other hand, speculating means buying and selling over a very short period of time. Some speculators are called day traders because they are buying and selling shares even within the same day! Speculation is extremely risky and as my father always told me, if you want to speculate you might as well go to Las Vegas and put all your money on a spin of the Roulette wheel.
It is also important to have realistic expectations, don’t expect to become rich over night in the stock market. One of the most successful investors, Warren Buffet, once said that if you cannot hold a stock for 10 years, you should not even consider holding it for 10 seconds. Take the time up front to do your research and make wise investment decisions and then stick to your strategy over the long term.
When buying a stock you cannot expect the future direction of the overall market or of an individual company to remain the same as it has been in the past. It is impossible to correctly predict the short-term ups and downs of stock prices. This is why speculation is so risky. A stock’s price reflects the overall market expectations for that company and unless you have information that others do not have and are using it to you advantage, (a practice known as insider trading which is illegal) the current price of the stock already factors in all the public information available to investors.
In general, the price of a stock rises when more people are willing to purchase it rather than sell it. On the other hand, when more people are willing to sell it rather than buy it, the stock price declines. The price of a company’s stock doesn’t necessarily reflect how well the company is currently performing, but how investors think it will perform in the future.
What makes you think that you have a can make reliable short term profits? Some speculators trade the same stock several times within the same day attempting to take advantage of daily price fluctuations. You might be lucky and profit using this strategy a few times, then you start getting greedy and eventually the market turns against you and all of a sudden…game over.
Investing in the stock market is a fascinating world and by applying some basic principles you can both enjoy the process of selecting the stocks that best suits your investment objective and have the potential to provide you with a good long term return on your investment. I know several people who are scared of losing their money in the stock market and decide to keep all their money in a bank account that provides a very low interest rate. The truth is that by doing this they are already losing money because the interest they are receiving does not even keep up with inflation. It is important to remember that simply to stay even, your investment rate of return, whether it is in equity, bonds, savings account, etc, must be at least equal to the inflation. The stock market is an asset class that over the long-run has consistently provided a rate of return greater than the rate of inflation.