Investing in stocks presents many challenges and some may seem so complicated that it is tempting to just give up any form of analysis and take a wild guess about a stock.
Unfortunately, guessing about stock investment decisions is just what too many stock investors do. The thing about guessing is sometimes you are right, but sooner or later you will be wrong and the consequences are painful.
It is important to have a sense of the state of the economy and stock market in terms of how those two forces may affect stock prices.
Fortunately, you don't have to be an economists or stock market analysts to get a sense of what is happening. However, you do have to understand that the economy and the stock market are two different forces.
The economy (meaning economic indicators) is almost exclusively backward looking, while the stock market (market indicators) is forward looking. The stock market may react to economic forces (unemployment, retail sales and so on), however only in how they may shape future earnings and stock prices.
The Economy
The U.S. economy is but a small part of a much larger global economy. Troubles in much smaller countries can (and do) spill over into the global economy and may help or hurt the U.S. economy.
There are numerous tools and resources on the Internet to help you follow key economic indicators.
You are particularly interested in whether the economy is growing, receding or stagnant. A growing economy bodes well for companies that expand in this environment, including retail stores, tech companies, housing and so on.
A receding economy favors companies that make necessities, such as food, utilities and so on.
A stagnant economy (little movement up or down) is more difficult for investors to manage, however some health care industries continue to do reasonably well.
The economy seldom moves rapidly in any direction, but since most economic indicators are looking backward, trouble may appear suddenly when, in fact, it has been a factor for some time.
The Stock Market
The stock market can move rapidly in either direction depending on many factors. Daily stock prices are driven by supply and demand from stock traders primarily. Unlike long-term investors, traders are concerned with betting on price changes and being right about the direction.
In many ways, long-term stock investors should pay little attention to minute-by-minute price changes. Even daily changes are too frequent for arriving at a good picture of where the market is headed. The exception to this would be a long-term investor planning to buy or sell, in which case daily price changes are important.
The long-term investor is more interested in long-term market trends than daily fluctuations. There are many tools that help you watch these trends.
When looking at market indicators, it is important to look at the long-term trend (past 52 weeks, for example) and see if any of the indicators are signaling a possible change in direction or speed.
Market volatility (when there are rapid and dramatic swings in price and volume) reflects uncertainty and can be a dangerous time for stock investors. It may be tempting to jump on a stock whose price is bouncing in hopes of grabbing a quick profit by buying low and selling high.
Stock traders make their living (or go bust) doing this. Unless you are willing to devote many hours to learning to trade stocks (buy and sell over a short period), don't be tempted by what may seem to be easy profits. Save your guessing for a $2 lottery ticket, at least when you lose, it won't hurt so much.
Here are three initial steps to better stock investing:
