How to... Understand the stock market

promo image Before you take the plunge, here are some key steps to consider towards building an understanding of the stock market

From How To Do Just About Everything to Succeed, in association with eHow (Collins, £9.99)

Steps

  1. Understand 'equity securities'. As an investor, when you buy shares you take an ownership stake in a company and assume a corresponding degree of risk - so you could end up losing all of your money.
  2. Learn the language of the market, familiarising yourself with such financial terms as 'price-earnings [PE] ratio', 'margin', 'option', 'earnings per share' and 'leverage'.
  3. Analyse the holdings of a number of successful fund companies, noting which shares they have held - and those discarded - over the past three or four years.
  4. Make a habit of reading the quarterly and annual reports filed by the biggest players on the FTSE 100 index.
  5. Research companies of which you have personal knowledge - and a high degree of confidence. Evaluate their financial reporting, looking for trends that indicate growth and continuing profitability.
  6. Get online. Dozens of companies offer financial news, advice and analysis online.
  7. Take advantage of all the information your stockbroker has to offer regarding individual shares. Always know what you are buying - and why - before you invest.
  8. Invest on paper for a few weeks and carefully monitor the performance of your prospective portfolio before you actually apply to buy stocks and shares.

Tips
Invest in reputable companies and stick with them for the long haul.
When paying for financial advice, make sure that you know the brokerage fees beforehand. These can vary to a surprising degree. Set up an electronic portfolio of your stocks through an online service such as Yahoo! Finance. This will allow you to monitor your shares' performance throughout the day and to get the latest news about the companies you've invested in.
If you don't have the time to do your own research, invest in a managed fund that has had good returns for at least three years.

Warning
Be prepared for a roller coaster ride. The market can be volatile.