“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffet
“If you’re not confused, you don’t understand what’s going on.”
The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.
There is usually a designated market for every commodity. Such dedicated markets serve as a platform where numerous buyers and sellers meet, interact and transact. Since the number of market participants is huge, one is assured of a fair price. A stock market is a designated market for trading various kinds of securities in a controlled, secure and managed the environment.
The stock market goes up and down but in the long term (100 years) it has maintained an upward curve. Always remember that the long-term trajectory is likely to be good, even when the short-term news is dismal and the market is getting hammered. Market turmoil isn’t something to fear. It’s the greatest opportunity to make money.
The gross return of the market minus the cost of investing equals the net return to investors. This “cost matters hypothesis” is all you need to know to understand the benefits of index investing.
- Bear Markets
- Stock Markets can be wildly volatile along the way. It’s not unusual for the market to fall 20% to 50% every few years. On average, the market is down about one in every four years. A bear market means prices are dropping at a rate of over 20% over the short term. Historically, bear markets have happened every three to five years on average but the gap between bear markets and bull markets (Bull Markets) is getting longer in modern times
- Bull Markets
- A Stock Markets bull market means that prices are progressively rising, going up aggressively, usually in the longer term.
- A 10% fall in the Stock Markets is called a correction. On average, there’s been a market correction every year since 1900. Corrections are just a routine part of the game. Instead of living in fear of them, you have to accept them as regular occurrences
- Diversified Returns
- Think in terms of what offers the best returns. You do not need to be tied to Stock Markets. For example, the help to save account (UK only), if you are eligible, offers a guranteed return rate of 50% over 4 years. Beat that in the market! Look for opportunities everywhere, low risk, high reward.
- Index Funds
- An unmanaged basket of leading Stock Markets stocks such as the S&P 500. The fund simply owns all the stocks in the index (for example, they would own all 500 stocks in the S&P 500). They make very few trades, so their transaction costs and tax bills are incredibly low. They also save on other expenses such as active fund managers and their teams.
- Asset Allocation
- Different asset classes don’t usually move in tandem and success is largely dependent on smart asset allocation. By knowing precisely how much of your money to put in different asset classes such as Stock Markets, Bonds, real estate, gold, and cash (see also; Holding Cash is a Bad Investment), you can protect yourself against disaster by building a portfolio that’s broadly diversified globally and also among different types of assets.
- A Customized Approach to Asset Allocation
- Explore. The core of your portfolio should be invested in index funds that simply match the market’s return. But at the margins, it can make sense to explore additional strategies that offer a reasonable chance of outperformance. Look outside of just the Stock Markets for investment opportunities
- Being Unshakable (in regards to investing)
- Nobody can consistently predict consistently whether Stock Markets will rise or fall. It’s delusional to think that you or I could successfully “time the market” by jumping in and out at the right moments.
- Holding Cash is a Bad Investment
- If you want to be certain that you’ll never lose money in the Stock Markets, you can keep your savings in cash—but then you’ll never stand a chance of achieving financial freedom. As Warren Buffet Knowledge says, “We pay a high price for certainty”. Simply saving money doesn’t generate future wealth.
- To guard against inflation, a common advice is to invest in Stock Markets, but stocks failed to keep up with inflation about one-fifth of the time.
- Market Crash
- Stock Markets crashes happen more often than you might. The key to surviving them is being prepared. They occur after significant and rapid declines in the stock market over a short period of time (potentially as short as one day in some cases). Any one-day decline of 10% or more in a single day can be described as a market crash.