Summary: How should a beginner start learning about the stock market? This page looks at some of the best ways to learn stock market techniques and strategies to help speed your progress as an investor.
It goes without saying that any subject as large and potentially diverse as stock market investing could be studied from many different directions and with a large number of goals in mind. Yet despite that, there are some things that almost certainly should remain constant.
It might be worth pointing out early, that if you dislike reading, learning and soaking up new information, learning about the stock market and investment generally might not be for you. However, if you are still reading...
1. Understanding the day-to-day market news and moves is an absolute must. The first place to start is with a great quality newspaper. Where you live and which market you plan to invest in will largely determine the newspaper which is most appropriate to you. However, some great papers with excellent international coverage include the Financial Times of London and the International Herald Tribune. The Wall Street Journal is another excellent and informative read.
Should you plan to trade, rather than invest (information here), then understanding the ticker tape will be important. Not only will it help to get a "feel" for how prices actually move, but it will also provide insight about the relationship between company news and the minute by minute reaction to it.
As your skills progress, it will be important to start thinking about what you should expect. For example, it is often the case that when a large company announces very good numbers in it's annual report, the stock price falls. Why is this? Sometimes the market and analysts had been expecting better results and these better results were already "in the price". These are the kind of nuances that are vital to learn about the stock market as your experience grows.
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For those that trade, the same concept will be even more important. When a piece of news breaks, especially a very visible event such as an earthquake or oil spill, the first response for the most successful day traders will be, "Who benefits and who loses?", with a desire to immediately go long and short on their instincts.
2. There are many weekly magazines that specifically cover money, finance, stocks and investment. These will look at the annual reports and news releases of all quoted companies in a way that a daily newspaper cannot. In the UK, for example, is the Investors Chronicle - one of the longest running magazines in Britain and with excellent coverage of all stock and share related investments. Find one relative to your market and add it to your regular reading matter. It is almost certainly worth adding The Economist and Business Week to your regular reading as well.
There are also many great websites that have lots of interesting and insightful free content. The real problem will be learning to select just a couple to read regularly to ensure that you do not spend your entire life reading articles and blog posts. Obviously CNN, MSNBC and the BBC sites are each insightful. Yahoo! Finance and Market Watch are both excellent. For the more professional view, Bloomberg and Reuters are recommended.
It will also be worth recognising which publications and authors to regularly avoid. For example, there is typically a great deal of discussion about economics, money creation and the policy of central banks. Some of this has relevance to capital markets, but much of it does not. Learning to ignore some of this will save significant time and mental energy and will probably have no negative impact on your investment returns.
3. Much can be gleaned from studying stock market history. Here, we are suggesting that some stock market history be studied. Even the great Warren Buffett suggests that every investor should learn about market history and what made things happen and why. Who can argue with that? Most of the history of any market will coincide with the movements of the business cycle which will link to the basic economic knowledge you'll need (discussed below).
It is worth adding that the history of the Dow Jones and Wall Street probably ought to be added to knowledge about your own stock exchange if you are not based in the United States. Simply learning about the NYSE and it's development can be very interesting.
While learning about Wall Street history, be sure to notice and think about the impact of psychology on markets. The collective thinking (or herd mentality, if you prefer) can have a massive impact on prices in the short-term and is not to be overlooked.
It is worth pointing out that the development of financial markets around the world was very much influenced by it's participants, namely investment banks, central banks and the largest corporations. As such, the further back you read, and the more you discover, the less relevance stock market history has. The modern world of algorithmic hedge funds bears very little similarity to the time when Jesse Livermore traded, for example. Therefore, one concept to always remember is that there is very little that is static in a capital market - there will be constant change and innovation in techniques and strategies. Expect the unexpected.
4. The world of finance and investment has seen many great minds. Some of these stars are still operating in markets today, others have long since passed. Many of them have put their thoughts, experiences and strategies down on paper either to show us all how great they are / were or in the hope of book sales. Either way, shorten your own learning curve by studying their work, it will be very useful.
Some names to look for include, Warren Buffett, Benjamin Graham, Jesse Livermore, Peter Lynch (information here), George Soros, Jim Slater and more. A few works by or about these people will teach all new and most experienced investors a thing or two.
Learning about the stock market also requires some background knowledge in other related areas. You won't need to become an expert, but when you read about the thoughts and commentary of experts, it will be useful to be able to understand them.
You might also find it useful to learn a little about the new age of trading that is upon us via computer algorithm. Many are operated by hedge funds based in and around Wall Street. Unless you have some serious math chops, don't expect to be able to copy these huge operations. However, they are involved in a very large portion of all trades these days and so understanding what they do and how to prices should be instructive.
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5. Getting to grips with some basic economic terminology will be very useful. Most investors do not need to be economists, but understanding the business cycle and broad economic states won't hurt. Equally, should you plan to invest internationally, an understanding of how and why currencies move as they do will help. The relationship between the prices of commodities (especially oil) and currency, bond and market prices is also well worth investigating.
There is also a lot to be learned about the stock exchange and it's workings as well. There are a number of rather odd phrases used by fund managers and investment analysts, so it would be helpful to come to terms with them.
Additionally, the terms used by stockbrokers (information here) can be quite bewildering and you might need a little study time to become familiar with them.
6. Good investment is the study and selection of good businesses. That being the case, all businesses - good and bad - use accountancy to keep score. Again, you don't need to become an accountant to be successful at investment, but you will see lots of numbers. It will be important to understand what these numbers and ratios mean, what they relate to and their impact on an investment or stock price. Being able to understand some of an annual report will be a real advantage in the long run. Reading just one book about accountancy will probably be enough - but you will need to read one...
If you hand an annual report to the majority of people, their eyes will glaze over in seconds and their brains enter some sort of fog. As an investor, this cannot be you. Your reaction to an annual report needs to be more along the lines of, "Cool! Now I can really understand what goes on!"
Personally, I make a game of searching for the details of the remuneration of the executives (in many countries, companies are required to list the amount earned by the highest paid member of staff). While I am hunting around for that, I am forced to look at information on lots of pages. That gets me past the mental fog so that I can take in much more of the report.
Bonus Stock Market Tip: At the outset, making a clear choice about whether you wish to invest actively or passively (information here) can help to focus the mind on specific targets.
For example, by investing an amount each month into a managed fund (passively), it is not required to follow the economy or markets nearly as much. It is passive for a reason! In this circumstance, it may not be necessary to learn about the stock market at all. It might be better to simply understand basic macroeconomics to know where the national and global economy is heading.
If this sounds interesting to you, then your main job will be to understand some basics about the national and global economy and make decisions from there about what sort of mutual funds or ETFs you wish to invest in.
On the other hand, an active investor or a trader - or even a day trader - will need to have much greater levels of market knowledge and understanding. Being able to judge with some degree of accuracy when and why a stock price will move is a very valuable skill! And, alas, it requires a great deal of patience and understanding to be able to do it. To trade, it will be vital to learn stock market patterns.
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It will also be necessary to gain an appreciation of the workings of a stock broker (since you will be using them often to buy stocks). Depending upon your liquid capital, it might also be prudent to think about the types of companies that will be appropriate for you (for example, penny stocks (information here) or companies listed on the S&P500;).
To conclude...
It is worth considering that different sectors and industries and different countries can have very different conditions for an investor. Therefore, while it is important to learn stock market terms (information here) and strategies, it is also worth learning about the financial market that you plan to focus on. Therefore, some time ought to be spent learning about the Dow Jones if you want to invest in blue chip stocks or learning about the NASDAQ if you plan to day trade, for example. There can also be some interesting nuggets found when reading about the histories of the major investment banks - many of the Wall Street investment houses and City of London merchant banks have forgotten more than we mere mortals will ever know.
It will probably also prove to be valuable to start with some form of early paper based practice. This will allow you to play the stock market (if only hypothetically) and learn all about the stock market at the same time.
There are lots of very highly priced training courses that can and will help improve your understanding the stock market. However, there are also hundreds - if not thousands - of very good books (suggestions here) that are available on amazon that will help you significantly for just a few dollars each. It might be best to start with a handful of books to learn stock market theory and the overarching concepts so that you can discover the direction you wish to pursue in investment.
To read more about getting started in investment, please also read:
Beginners Guide To The Stock Exchange
Beginners Guide To The Stock Exchange - Part 1
Beginners Guide To The Stock Exchange - Part 2
The Stock Market For Beginners: 7 Starter Tips
How To Start Investing On The Stock Exchange
The Suitability Of Stock Investments
What Is The Stock Market?
Why Should You Start To Invest On The Stock Exchange?
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