Make money in the markets is easier than most people think, but the lack of knowledge about how markets work is what causes that most don’t succeed.
Let us first look some misconceptions that people have about how to make money in the stock market, then I explain how markets work and finally we will see what to do to succeed in the markets.
Misconceptions About the Stock Market
Many people think that make money in the stock market requires extensive knowledge of finance or maybe simply get lucky by choosing some stock that greatly increases its value in a relatively short period of time.
The experience of trading the markets has taught me that none of these approaches are suitable to progress and earn money investing in the markets.
Reality is that to know much about economics and finance does not guarantee good results in the markets. The reason is that markets do not move by the fundamentals of the stock. I’m sorry for all those who think otherwise, but the value of a company has little to do with the price of its shares in the short time.
Furthermore, be lucky choosing a stock does not lead to success because the buyer of the stock will not sell at the right time and probably end up losing all the gains. It is the same situation as to who wins the lottery, if he is not educated in how to manage his money, in a short time will be worse off financially than if he had not been lucky enough to win.
How Stock Markets Work
The stock market works more like a public auction in which everyone wants to buy what others are willing to pay more for it. Thus there are stocks that become attractive to investors even though the real value of the company is much lower than the share prices.
When a stock rises, investors realize this and want to have this stock in their portfolio. As the stock becomes popular, more and more buyers take advantage of any pullback to buy, giving more strength to the stock.
This buying spiral continues until other stocks catch the eye of investors or until the market becomes saturated and under the guise of any news that acts as a catalyst, starts a bear market.
How to Succeed
The success lies in understanding market behavior and apply to the markets the same principles that are needed to maintain a healthy economy.
The main thing is always preserve capital, that is, under any circumstances allow that an investment causes a large loss of capital. This means that we must limit the percentage of capital at risk in any investment.
Then, knowing that the stock market is like a big auction, we must be sure that there are sufficient stocks in the market in which investors are increasing bids to buy, this means that the market is bullish.
Once we know that the market is bullish, our job is to keep an eye on stocks that arouse more interest among investors and buy these stocks.
As soon as the stocks chosen begin to lose strength, we must jump to other stocks that have caught the attention of the investment community. This we will repeat while the market remains bullish.
These are the basic principles for success in the stock market, limit the risk of each investment, buy stocks that are now rising and sell the stocks that stop going up.
This article was written by GoodTrader, owner of Stop Market Risk, he is a trader and educator who helps novice traders to succeed in the stock market.
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