The world’s first stock market opened its doors during the 1400s in Europe; trading did not start in the US until 1817. Products or services we consume, the strength of our local currency, the price of 1 gallon of gasoline – these are all things that are directly impacted by the world economics and the stock market, but still, how many of us really understand, even in high-level, what’s really going on in there? Here are 5 basic things you should know when it comes to the stock market.
If long term growth is the idea, there are a few calculations that must be done before a company’s stock is purchased. There are the net profit margin, the return on investment, debt to cash flow ratio and finally the P/E ratio. Calculating these ratios will allow a long term trader to determine the strength of a company and their ability to generate a profit over the long term.
For the day trader type of investors, it’s all about being able to predict the movement of the market or of one particular stock or option and being able to take a profitable position. The long term simply doesn’t exist and the ROI of his investments are not being measured over a period of months and years, but instead, over hours and even minutes or seconds.
Want to better understand what long investment is? If you would have bought Google shares in the worth of $1,000 when it officially went public in August 2004, you would have had by now a little less than $20,000! Just think how much money you would have earned if you had invested $100,000…
Booms and Busts
Booms and busts occur cyclically and are a part of every business. Good traders make money by anticipating a boom or a bust in a stock’s price based on the current cycle of the supporting business. Persons can make money regardless of the stage of the business cycle by choosing to go either short or long on a trade. In below chart tells the story behind the US stock market major falls in the last 90 years or so. The overall trend is clearly up, but in almost every decade in the last 40 years, there was a major economic crisis that made the market crash. While many people have lost tremendous amounts of money in the last 4 major crisis the market has experienced, others saw it as an opportunity to start collecting massively stocks that were clearly underpriced.
Day traders do not care about the long-term prospects of any company; they just want to make a profit on each trade. To do this they monitor the stock prices based on the historical performance charts. After this analysis, an educated guess is made to determine if the prices are going up or down. Regardless of the trend, money can be made by going long or short on the price.
Stock Market Indices
Indices are measures of the overall market’s health and performance. For the past 200 years the general trend has been generally upward but there have been periods of decline. The major indices to monitor are: NASDAQ Composite, Dow Jones Industrial Average, S&P 500, S&P Asia 50, EURO STOXX 50, S&P Latin America 40 and the German DAX. There are many other indices to choose from therefore being a niche trader is the best way to make more money.
This relatively new form of trading has revolutionized how the stock markets operate. Once termed as a technological arms race, between 60-70% of all transactions are done via these online systems. The premise behind them is quite simple; the HFT is a series of complex software that constantly scans the markets for the best prices available. Once found these systems buy and sell in a fraction of a second. While the profits may be low per trade, the volume produced generates billions for the investment firm using the software. The controversy comes when firms begin to use spoofing and other dubious methods to entice fake trades. The fake trade then forces the market to react which usually decimates anyone trading with the computer.