When it comes to investing in the stock market, it might seem like a path to instant success for some, and gambling for others. The prospect of making money seems exciting and easy compared to other options, while the thought that you could lose money may scare you away. The reality is that the stock market is one of the greatest places to build your wealth, but can cost you dearly if you do not know what you are doing.
The stock market always has new investors that try to come in and make money really fast. For many, it’s the belief that they can go all-in at a roulette table, and hit their number with a massive payoff. But the reality is that very few people get that lucky in the market, and often that approach to the market is what can cost investors. So here are three critical things that new investors should understand about the stock market.
Look out for insider selling
Most new investors appear always willing to do the research and not just buy a well-known stock. They are usually smart enough to understand some of the basic metrics to follow like revenue growth, earnings per share, and price to earnings ratio. And so quite often after doing research, they decide that the basic metrics that many investors follow are solid and they open a significant investment into that company.
While some volatility can be expected, one of the things that come with little to no announcement is when insider selling takes place. Insider selling is when people within the company own shares, and then decide usually based on known insider information that they are going to sell some of their equity in the company. While they are required to disclose this information to the SEC when they make big transactions, even with proper notice, their transaction will move the stock price and ultimately their net position.
You only lose money when you sell
When you buy stocks in a brokerage account, the account will always be able to provide you real-time about how much your position is based on the active trading price. Therefore, whenever you bought your position, you will not only see the value in your account, but it will also show you if you are currently profiting off your investment or losing money on it. The feeling of seeing red can seem very daunting because, like gambling, you think you’ve lost money.
It’s important for investors to realize that part of market investing is that more money is made over time than trying to time the market. Not many people are very good a lot of the time of buying equity in a company and seeing it instantly gain value. But, ultimately, as long as the company continues to perform, its price should move up with it. It’s important for investors to know that until you sell it, it’s not a real profit or loss. It is only an instantaneous representation of a stock’s value at a time point.
Investing is not trading
It’s important to know that in the stock market, there are always two different types of people with different trains of thought. There are traders who try to act on short-term pricing movements to maximize quick gains. Then there are investors who take a long-term approach to the market and try not to get caught up in the volatility, but rather the long-term intrinsic value of the company.
Traders will look at what are called technical indicators which are looking at granular price changes to track the behavior sentiment of a stock. Many times, traders are competing against other traders but may also be trading against investors as well. It is almost a science for them. To make money quick on volatility, they have to risk a lot of money. Investors will stay away from this noise and not get caught in the price volatility. They must always think long-term and if price movements are to their advantage, by buying more low and selling some high.