Investing for Dummies - Keys for Becoming a Successful Investor

What is the Stock Market?

The stock market is a market where investors can buy and sell securities at a price agreeable to both parties.  While the name of this article is investing for dummies, it actually does require some smarts to be successful in the stock market.  Stock markets have been around for hundreds of years.  The first known exchanges popped up around the 11th century in Cairo, where merchants could buy and sell commodities from one another.  Later in the 17th century, the Dutch developed many of the instruments still current in the market today (short selling, margin, etc.) for conducting trades.

Why Do Stock Markets Exist?

Stock markets are the fuel of capitalism.  Many newbie investors think that buying a stock is simply purchasing a piece of paper over the internet, with the hopes of the stock rising over time.  Without the stock market every major economic power in the world would collapse.  Companies sell shares of their company on the open market to raise capital for expanding their business.  The company will not sell all of its shares, in order to retain a controlling interest in the company. 

To put it in Lehman's terms, think of a stock market as a free form of financing, where the funds received from investors buying shares allows a company to purchase more equipment and conduct R&D activities to expand their business.  This growth of the company will lead to job openings, hence strengthing a country's economy. 

Stock Market Indexes

Stock markets will contain thousands of stocks which are listed.  A good idea is to first begin to track the actual index of a country's markets in order to gauge the health of the economy.  In the U.S. two good indexes to track are the NYSE and Dow Jones.  While in India, a good measure of the economy is the BSE Sensex.  It is best to look at the market from this top-down approach in order to get a feel for the up and down moves in the market, also known as market volatility.

How to Invest

After looking at the market and determining that the market is in an uptrend, the next step is to get in the game

Online Trading

After opening an online brokerage account, it is best to not put on any trades, but rather to follow a number of stocks.  After following the stocks for a number of time, the next step is to begin paper trading.  Paper trading is when you monitor your buy and sell orders without placing any actual trades.  This process helps the investor develop their trading skills and overtime you will begin to understand your unique trading style.

Mutual Funds

Investors can also target mutual funds, where the investor buys a fund which contains a basket of stocks or security.  This form of investing is more conservative as the speculator is not buying shares of an individual company.

Do Not Get Addicted to Risk

Many new traders do not take the time to properly understand the investing game.  Many simply run out and jump in the water in the game of investing, never fully understanding what they've just done.  For some investors, this can lead to over trading and an addiction to risk taking.  This is where investing goes from being a business, to simply chasing the rush that comes from being exposed to risk.  If an investor wants to get a adrenaline rush, get on a roller coaster, but stay out of the market.

Be Patient

Investing for dummies does not mean that investing is easy.  Investors will have a much better chance of being successful of investing on their own, if they simply take their time and learn the game of investing.  This means reading as many books as possible and doing a lot of research on a company or mutual fund before making an invesment decision.  Remember, its not the amount of trading activity that counts, but how much money you are able to make.