Investors interested in participating in stock market investing can form a portfolio of stock investments they feel will increase in value. They can sell the stocks at a higher price and realize a profit known as a capital gain.
Diversification is used within an investment portfolio to reduce risk. By investing in companies in a variety of sectors or even countries, one can reduce the vulnerability to negative price fluctuations affecting specific companies.
Risky business: diversification refers to the act of reducing risk by investing in a variety of assets. Generally speaking, when one asset goes down in price, other assets will not go down by the same amount. Some may even rise in value due to the same factors that cause another to fall. By creating a diversified portfolio including investors can significantly reduce the risk of an overall portfolio.
The “asset mix” refers to the allocation of investment money into different types of assets, or “asset classes”. The appropriate asset mix for an investor depends on many factors, specifically, their age, income, risk tolerance and personal circumstances.
Choosing investments or “holding” for a portfolio can be challenging task and investors and investment professionals use countless concepts, models and strategies in an attempt to predict which investments will perform best over time and be best suited for inclusion in a particular portfolio. The two basic forms of investment analysis are technical analysis and fundamental analysis.
Technical analysis is often known as “charting” and is based on the idea that the future trend in prices can be predicted from charts of past records of prices and trading volume.
There are many different types of indicators that technical analysts attempt to interpret. Some of the most common ones include stock price trend lines, volume changes, breadth of market and new highs and lows.
Analysts use moving averages as a way to smooth out stock prices over a period of time. It helps analysis form a long term trend, which they often believe the stock price should return to. Trends are altered when the stock price breaks through the trend line on strong trading volume.
Accumulation (or “reversal”) patters are formations on charts that usually precede significant increases in stock price.
One example of a common pattern recognized by technical analysts is the “bottom head and shoulders pattern”, which is considered to be one of the most reliable patterns.
The bottom head and shoulders pattern is a chart formation in which a stock’s price:
1. Rises to s peak and then declines.
2. Then, rises above the former peak and again declines.
3. And finally, rises again, but not to the second peak, and declines one more.
The first and third peaks are “shoulders”, and the second peak forms the “head”. With this pattern shown, since the Neckline” slopes upwards, analysts would expect prices to rise over time.
On the other hand, other patterns could give indication of coming declines in share price. This technical topic is beyond the scope of this book, but having a basic knowledge of the vocabulary you see here can help you research and learn more in this field.
Trading volume is often studied as high volume in changing prices can indicate how long prices might be expected to rise or fall. “OBV” or “on balance volume” is a line graph often found at the bottom of a stock price chart indicating trading volume.
Breadth of the market refers to the number of different stocks being traded in a given period. This is considered to be an important figure as it indicates what is happening to the supply and demand for all stocks, not just a few blue-chip companies.
Fundamental analysis studies many factors to determine how securities prices may change. Analysts assess the profitability of companies, their ability to pay dividends and the rate of growth of those dividends.
A variety of items and ratios are studies many factors to determine how securities prices may change. Analysts assess the profitability of companies, their ability to pay dividends and the rate of growth of those dividents.
A variety of items and ratios are studied to assess the profitability and potencial growth of companies and their share price.