Investing - Adversities of knowledge deficiency

Once ruled by wealthy men, the Stock market has now become so common that people who can save the surplus has an inclination towards investing in it, as investing in stocks is considered lucrative. Complimenting this interest, the technological development makes the stock market investing too simple that investors can place the orders by making a simple phone call.

This simplicity, sometimes, makes investing more complex to some investors. But, how? Well, the simplicity in the process of investing is, at times, wrongly perceived as the investing is simple, per se. This misconception can misguide the investors in buying a stock at a wrong time or at premium without being aware of it. This kind of misplay, often, has negative impact on the capital, sowing the seeds of fear.

Afraid, the investors are forced to take a different approach on investing to protect the capital from further losses and to recover the loss incurred.

This is where they usually resort to brokers’ recommendations or invest based on the news about a stock, and the market, in general; then again, being unaware of the downsides of the news or the recommendations.

The News:

Although many investors buy stocks based on the news, it’s wiser to know that the news, in itself, is not a reason to buy a stock, whereas, a (positive) news is just another confirmation that a stock might do well in the near future.

When the investment is based only on the news, leaving apart other information might be harmful to the capital, as

‘A stock makes most of its move even before the news is released,’ due to the Insider trading activities.

So, the people who are too dependent on the news are more likely to get trapped in the buying climax; a price range, from which a stock most often reverses or falls.

The Recommendations:

Investing based on brokers’ tips and recommendations is not uncommon, as it’s a general notion of the investors that the brokers might know about the insider activities and information. Although this could be true, there might be some greedy brokers lurking to take advantage of investors who are not aware.

You could have been in a situation where you bought a stock (recommended by your broker), hoping to make profits, until the stock fell sharply, trading in pennies, and never rose up again.

If you’re wondering what caused this, the reason is too simple:

There are some unscrupulous promoters who buy the greedy brokers to recommend their unworthy stock. As more and more investors are committed to buying, the demand for the stock goes up, until the unscrupulous insiders ‘Dump’ their holdings at a higher price level.

The one-sided approach:

Although it’s right to think that the stock market investment yields higher returns, it should be noted that it comes with risk. But, the (expected) returns might be so compelling that one might fail to see the negative side completely.

This kind of one-sided approach might lead one to ‘believe’ that the price of the rallying stock (that one is holding) might rally higher, and ‘Hope’ that a weak stock in one’s portfolio would somehow gain strength and rally again.

Often times, this type of approach have adverse effects on the portfolio.

‘It should be noted from time to time that the stock market is NOT moved by beliefs and hopes.’

Healthy investing - Basic requirement:

Stock market investment can yield more profits consistently, only if the basic requirement is met properly by the investors. So, what is the basic requirement?

Knowledge about the subject is considered the most fundamental requirement for stock market investment.

In order to build a healthy portfolio, an investor ‘Must’ put on some effort in knowing about the company in which he plans to invest; its history, the base capital, nature of business, earnings, cash flow, assets and liabilities, its past performance and so on.

After all, investing in a company, technically is, ‘Owning’ it. So, it deserves a little effort from the investors’ side to do some research before investing.

Some people, however, might not be having time to do the research, in which case they recruit analysts who are specialized in the field to pick the stocks for them.

Conclusion:

Although the stock market is lucrative, it requires a clear understanding of the subject before investing in it. It’s difficult to make money in the stock market without prior knowledge, and, having said that one might not need to be an expert to invest in a stock, but it’s a very basic necessity to have a decent knowledge to make a fruitful investment.