Here’s why you should educate yourself about the stock market

The stock market can be very volatile, as investments made here can be a risky move while it shifts according to the ebb and flow of events happening around us.

For instance, Facebook was recently rocked with a scandal alleging that the social media behemoth exposed data on 50 million users to a researcher employed at Cambridge Analytica, a political research consulting firm involved in Donald Trump’s presidential campaign.

Following the news of the scandal, CNBC reported that Facebook’s shares fell over 13 percent in the week of March 23, closing below $160, and the company lost about $75 billion in market capitalization on the same time period. Moreover, the news that the U.S. Federal Trade Commision is investigating Facebook’s data practices has sent its shares tumbling by as much as five percent on Monday, March 28, per CNN.

Facebook’s case is just an example of how volatile stocks and the stock market as a whole can be and why it pays to learn how it moves and to reduce the reliance on investor forecasts.

Down to the basics: understanding the stock market

At the cornerstone of learning about the stock market is understanding how it works. First and foremost is knowing about the different exchanges, such as the New York Stock Exchange and Nasdaq. NerdWallet discussed in its 2017 article that publicly listed stocks are on a specific exchange, and these exchanges act as the market for the shares of those stocks from buyers and sellers. Individual traders are represented by a broker, where interested investors can place stock trades through the said broker.

Second, stock market indexes allow for investors to better track the movement of a stock or a group of stocks. One example of these is the Dow Jones Industrial Average (DJIA).

Investopedia explained that the DJIA is also home to 30 of the most prominent companies in the U.S. It is considered as a price-weighted index as well, which is computed by adding the per-share price of stocks in each company listed in the index and then dividing them by the sum of the number of companies.

Another example is the S&P 500, which is larger and contains more variety than the DJIA. Also, 80 percent of the U.S. stock market’s total value comes from the said index.

Third, there are the “bull” and “bear” markets. The former means prices are on the rise by 20 percent or more, while the latter is its exact opposite.

What can be gleaned from studying the stock market?

There are a few important takeaways when learning about the stock market. Because there are plenty of resources that can teach you moves on when to “buy,” “hold,” or “sell,” the bottom line is that investing in the stock market can be tricky.

According to another Investopedia article, the downside of the stock market is it is very unstable, and being a success in stock market investing is a combination of experience, skill, and luck. While learning the theories behind investing can be invaluable down the road, investors should “feel” their way around the market, such as recognizing activities, behaviors, and how markets interact with one another. Moreover, making the wrong investment can happen to anyone, even to investors who have plenty of experience, and it is also being in the wrong market at the wrong time.

Understanding how the stock market works is a basic skill a trader should learn. (Source)

Some helpful tips for young investors exploring the stock market

While the above sounds daunting, it shouldn’t hinder investors, especially the newer ones in the game to learn how to manage stocks. Like everything else, trial and error and learning what ticks are at the heart of learning the stock market.

Per StockTrader.com, some tips for young investors would include:

Do a lot of reading

Compared to taking expensive classes, attending seminars, and watching videos on investing, reading books is a more cost-effective way to learn and get yourself acquainted with the stock market.

Have a mentor

Your mentor could be anyone who has a clear understanding of the stock market. He or she should be able to answer questions, provide help, and offer up some useful resources.

Learn from stock market greats

Gathering new insights, perspectives and appreciation for the stock market can be done with the help of some investing gurus. CNBC’s “Mad Money” host and investor Jim Cramer and investing powerhouse Warren Buffett are just some of the great resources where you can learn more about this highly volatile market.

It’s never too late to start learning how to invest in the stock market. While it is constantly on the move, it would not hurt to keep abreast on the latest by reading and following the stock market for better familiarization.