Stock Market Truths To Understand (2)

As a stock market participant, it is not enough to ride the wave with the rest of the market or follow trends blindly

In our last post, we spoke about how the stock market functions as a community if its own and that in order to be successful in its dealings, there are certain truths you have to understand.

As a stock market participant, it is not enough to ride the wave with the rest of the market or follow trends blindly. Rather, you should understand the implication of every single action you make in the market, how it affects your investments, and how it affects the entire market as a whole.

While we reviewed a few trends in our last post, the following are more market truths to be wary of.

Market Corrections Don't Fail

One thing to understand is that while the stock market is largely volatile and unpredictable, there is a truth that market corrections will not fail you. When overall markets move in any direction, investors have certain periods where they can make swift decisions to correct losses.

One of such corrections is a stop-loss order. Where a loss is imminent or the price of an asset keeps crashing, a stop-loss order helps to ensure that you cut your losses and the price of a certain security does not fall beyond a certain price for you.

A stop-loss order is an order which is placed with a broker to buy or sell a stock once the stock price gets to a certain level. What this means is that if you put up a stop-loss order for 15% below the price that you bought the stock at, your loss will never be more than 15%.

This is just one of the market corrections available. There are also hedging tools used to curb losses and the truth here is that they will not disappoint you.

Begin With The End In Mind, Devoid Of All Emotions

We all have our different objectives for investing in the stock market and what this means is that we can tell if it’s working/ if we’re still in line and we can also tell if it’s on a completely different trajectory.

The idea here is being practical and logical without depending on your emotions for decision making – and this moves both ways based on your investment plan. On one hand, you can tell when a stock is overvalued or overpriced.

As such, instead of being greedy here, you need to be disciplined enough to see beyond the extra sums of money your investment is garnering, lest you are disappointed. On the other hand, fear too can make you take wrong decisions where it seems like the stock you invested in is performing poorly.

Stay focused on your goals and you will be thankful you did when things return to the mean.

Excess Movements Cause Even More Excesses

When driving a car and you are trying to turn to a direction, if you move too far in that direction, you will need to put in more effort to take it back in the opposite direction.

For an inexperienced driver, instead of returning to the midpoint, he or she might get the car moving too far in the other direction. In the stock market, when prices move too far in a direction, it will need to return to par but more often than not, things tend to over-correct.

When opportunities present themselves in the stock market, individuals tend to make the same move like buying the same set of stocks until the demand is too high and the prices themselves become too high as a result of the high demand.

On the flip side, if many investors ditch their shares and sell because of high prices, the prices will soon enough start falling as a way to get more buyers interested. The law of demand and supply in the stock market can mean that prices over-correct in either direction—upward or downward.

Investors, thus, need to be patient and understand this while being focused on their investment objectives at all times.

Written by Lawretta Egba.