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Moving Towards Stock Market Literacy

16 April 2007 - Features - Editor

Though 401(k) continues to offer unparalleled security compared to the retired lives of senior citizens in other countries, beneficiaries have to now learn the intricacies of stock market operations to cope with defined contribution plans. This is a positive move because it is not healthy to leave one’s major savings to employers and their agents. However, the secrets of optimal investing behavior can no longer remain the preserve of a few finance professionals. Stock market literacy has become a universal need for all professionals and for people with regular jobs.

Expectations for dream returns and appreciation queer the pitch for amateurs who enter a stock market arena. Investing in blue chips should be simple enough, but the earnings can appear puny compared to current prices, with only small rises in values over time. Powerful pitches for new kids on the block entice everyone to sink at least parts of their portfolios. Even if a retail investor in a stock market decides to rely on an advisor, it is still incumbent on the person to understand the fundamentals of financial appraisals.

Domain knowledge gives an extra edge for the best stock market transactions. Professionals and people who have been employed in various sectors of the economy can use the inside views which they have had of one or more industries, to make top picks. Conversely, investing heavily in enterprises about which investors know little runs risks of being carried away by exaggerated claims of promoters.

Another stock market approach to retail investing is to back companies whose brands you use. However, this route works best for consumer goods rather than for industrial products. However, it is worth backing companies which have popular and entrenched brands.

No one should work the stock market without understanding ratios. Profitability and revenue growth are popular, but gearing and liquidity are the kinds of concepts which are less widely appreciated, but which generally have major bearings on investment outcomes.

Avid stock market watchers go deep in to the business life cycles of the sectors in which they are invested, and watch macro trends at domestic and international levels to gauge likely impacts of values of their securities. However, this kind of enthusiasm can become a full-time approach, making a retired person work harder than when he or she had a regular job! That is not entirely a bad thing, though because it pays to keep busy and mentally alert as one ages, and playing the stock market can develop in to a most absorbing pastime-and financially rewarding as well!

Experience is a great salve for the daunting nature of a stock market when a novice first encounters it. The days of depending on others for a steady and lifelong pension draw inexorably to a close, and the sooner everyone begins to take interest in the ways of a stock market, the better off all of us can be.

 


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