To become an effective stock market investor that is a basic skill set that is necessary in order to give oneself a reasonable chance at success. While not every stock market investor need be an expert in each of the following areas, a cursory knowledge of each of these should be a baseline: fundamental analysis, technical analysis and chart reading, a basic understanding of financial reporting and risk management, potentially with the use of options. While a typical stock market investor may focus on one of these areas more heavily than others, to be a stock market investor one should understand each.

Fundamental Analysis

A stock market investor will understand that fundamental analysis refers to the study and understanding on basic financial metrics. These are measurements that allow a stock market investor to make judgments about the quality of a company and the efficiency with which it is run. For example, the price-to-earnings ratio tells the analyst how much he or she must pay for every dollar of earnings generated by the company; the lower the ratio, the better value the company should be in the most basic terms.

Technical Analysis and Chart Reading

A stock market investor will use technical analysis and the identification of chart patterns to aid in the timing of a buy or a sell of a given stock. The stock market investor knows that fundamental analysis tells one if to buy, while technical analysis tells one when to buy. The discipline of technical analysis is premised on the belief that everything that is necessary to predict the future price action of a stock is contained in the historic price movements and the stock\’s volume. Useful for predicting trends and turning points, the stock market investor will focus on technical analysis for significant changes in the direction of a stock.

Understanding Financial Reports

The stock market investor uses the financial reports that are made public by a given company as his or her primary source of fundamental data. Various regulatory agencies require that publicly traded companies publicize certain information at regular intervals. This information allows every stock market investor to have the same basic data with which to make trading decisions. Other financial reports include the macroeconomic reports that are published by the government. These reports give every stock market investor a background against which to place the specific company information that is being analyzed. Typical government reports tell a stock market investor things like the unemployment level, the growth rate present in the economy and other important information.

Risk Management

The use of risk management is the single most important element for any stock market investor. Without using proper risk management techniques, a stock market investor may make mostly correct choices and still lose money. An example of risk management that a stock market investor may employ is the use of options to protect against adverse moves in the price of a stock. With this technique, the stock market investor may take a long position by buying a certain stock. He or she will then use options to minimize the risk if the price of the stock falls. By taking these steps, the stock market investor is most likely to both generate a profit and remain solvent long enough for his or her analysis to pay off.

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Category: Finances
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