Okay, you finally decided to try your hands out on stocks. Afterall, you'd heard so much about how big money could be made in stocks. You'd gotten all excited, already budgeting what you would spend your anticipated huge gains on. You asked which stock to buy and they told you. No further questions, you provided money to a broker to buy you the stock. For the next one week, your excitement is bursting at the seams, because, true to what you heard, the stock price continued to climb as if something was pushing it. Suddenly, like a flash, it snapped, first like a joke. The first day of the next week sees the price lose ground, as if taking a pause to continue. To your shock, that slide continued for one week, eroding what you had gained. But it didn't stop there. Continuing unabated for the next four weeks, the stock price had slid to half of what you paid. Naturally, you got livid. They never told you that your hard-earned money would fizzle off that way. Somebody must bleed for this!
Just hold! Before you do something you will regret, it's good you know that the stock market swings that way. Not that you walk into the market to wait for and take losses. Just that price swings are a regular feature of the stock market and you better be prepared for that. That includes asking critical questions before you buy. It also compels taking some decisions before hand as to how much loss you can take on a particular stock before necessarily bailing out. Setting such limit is one way to protect your capital by minimising your possible loss.
The Pros Lose Money Too
Market price movements fail even the most-experienced pros. It's difficult to pick out any active investor that hasn't suffered a price loss on a particular stock. It's good to know, however, that a loss on a particular stock shouldn't necessarily mean a complete loss for you - except you haven't understood and applied some of the risk hedging mechanisms of the market. A diversified portfolio, for instance, should mean that some of your stocks gain in value when some have lost. Overall, you may still be in good shape, or at least incur a more bearable loss.
The Worst Can and Does Happen
The Nigerian stock market has recorded bearish periods, but nothing to call a major crash. On the contrary, the growth has been steadily upward. A key factor is possibly the low presence of highly speculative, heavy-volume investors (mainly international portfolio managers) who are extremely sensitive to market factors (they need to protect their huge holdings) and easily pull funds over the least prompting. They can easily trigger massive outflows that can upset the market. Advanced markets are not that insulated. The United States stock market has suffered huge crashes several times, the worst being in 1932 when the Dow Jones Industrial Average lost 86%, going down to 41.22 from 294.07 over a period of 813 days of decline. That index lost over 40% in each of at least eight other crashes within the last century. Even at the start of this millenium, the US market got hit again. The Dow went down from 11,792.98 to 7,286.27 (37.8%) over a period of 999 days - 1/5/2000 to 10/9/2002. These crashes simply meant that investors lost money, in most cases heavily. The Asians markets had taken their turn by 1997, suffering massive losses too.
You ask: were these not enough for the US and Asia authorities to permanently shut their stock exchanges and for investors to completely reject and shun stock investing? Surprsingly not. The market rebounds each time, after bottoming out and people continue to make money. If you ask me, that is the biggest endorsement for the stock market. It simply shows that those play in and profit from it understand its power to make money. They are not necessarily oblivious of the attendant market risk, but they know that, one, it doesn't happen everyday and, two, the market will always rally and bounce back. That in itself presents a big opportunity. You make the choice: stay off and expect the market to buckle every passing day while others make money (you're degrees below the conservative investor) or get into the fray hoping for the best, make money while others do, apply the avaliable hedges, put some of your gains elsewhere like property, bonds, etc and be happy and mentally prepared for the worst. Every business poses a risk and for its high returns potential, you can't blame the stock market too much.
Historically, the Market Pays Over Time
Beyond the jitter over price swing, its good you know that the stock market, historically and globally, has always paid, over time. What this says is that if you stay long enough, you have a high chance of achieving the financial success you aim for. This point needs be made because we've kept getting various enquiries from those who need help to throw in some money into the market, make a quick gain and exit. They usually state a time frame - a month, two or just a quarter - and they need advice or stock recommendations as to how to achieve that. My brothers and sisters, that's more a route to heart attack and may not be the best for you. Granted that some stocks have recorded outrageous gains over short periods (check this Explosive Stocks Report), it is not guaranteed to happen and is not a regular feature. It's better to trust in the market's ability to yield fair returns over time, choose stocks you can feel comfortable with for a long stretch, continue to monitor and make necessary adjustments, give it time to mature and be rest-assured that you will, all being equal, end up much richer.
'Today-tomorrow' gains? That's speculation and shouldn't be the core of your investing, if at all you will occassionally do so.
Now, It's Up to You
It's all been laid bare, so you are well-warned. That knife has two edges, but smart investors know how two use the right edge to cut what they want. Wondering if you're such smart investor? Peter Lynch is a respected name in stock investing and he had this to say, "everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it". Simply put, it's not beyond you. You only need to learn the ropes. Resources like the ones we provide on this web site or our investment seminars can help you do so successfully. If you stay scared stiff of what could happen to the market, where else are you absolutely safe? Don't put all your eggs in one basket is the old saying and it's still valid.
This basket, though, is too important not to hold some of your eggs.
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