1. The price and the value of a stock are different
Price = how much you pay
Value = what stock is worth
Buy when Price < Value
Sell when Price > Value
The question in investing is determining the value
What is the value of a tree?
Fruits?
Cost of seed?
Value as firewood?
The price of a stock is forward looking.
It reflects the "vote" of investors. If investors believe the company will make more revenue and profit IN FUTURE, the price today will go up even if the company has no profits TODAY.
The stock market is a voting machine.
Over the long-term, the value of the company will reflect the earnings of the company.
Value and earning will correlate unless the company grows future revenues by
Acquisition
Internal reorganization to cut cost
External laws that favor company
Investor can bet on the "votes" of other investors by trading & timing purchases
This is risky because no investor can determine with certitude what other investors will do all the time
Other Investors may decide to simply buy all the options available thus they buy the index
The index is simply a basket that contains all the listed stocks
S&P 500 is a basket of the 500 largest listed companies in the US
Buying the index is like you buying all jerseys of all teams on the English Premier League
Whoever wins the trophy 🏆 is immaterial, you won also
When a manager "beats the market" he's beating the index e.g. the S&P 500
The manager can return 6% and beat the index if the index return was 5%.
However index investing allow instant diversification, you automatically own Apple, Ali Baba, Alphabet by buying an index fund
For traders:
The price of a stock is based on demand and supply
If more investors vote yes and buy, price rises
If more investors vote no and sell price falls
The trick is to see that demand/supply coming and get ahead of it
Develop your indicators like understanding rates
For long term investors:
Be clear on your objectives.
Invest in an asset class that matches your objectives. Do NOT chase returns.
If you are younger, buy equities
If you are older, buy bonds
In closing
Before you start investing
1. Have a plan 2. Read up a bit. 3. Have an emergency fund 4. Got dependents? get insurance
After all these...then you can invest
Investing is not complicated, keep it simple.
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1. educate yourself on how money works.....read about money, investing, budgets, etc.
.
2. calculate how much cash you have to pay bills if you lose your job, get a figure in days/months. Have a plan to save/extend that figure as much as possible. for example, if you have just 1 week of "emergency funds" have a target to extend it to three months.
3. cut down on unnecessary spending, get a budget, stick to it.
4. Look for multiple sources of income, if you have 2 cars, start a private Uber, if you have a free boys quarters, rent it out, monetize your assets.
Chile is Capitalist ie free markets; target is equal opportunities
Venezuela is Socialist ie government controlled markets; target is equal outcomes
Chile is now richer than Venezuela who has probably the largest deposits of crude oil globally. Riches not based on crude oil.
NO government can create a job...ONLY the private sector can...all the government can do is redistribute .
Socialism has never made any nation rich, please note a capitalist nation can have an extensive social welfare programs eg Denmark, that does not make them Socialist.
"Socialist" government are governments that set prices eg for petrol, that own economic assets eg NNPC & even influence economic decisions like setting exchange rates for the economy.
The worst mixture is a Socialist government that is pursuing a welfare agenda like Venezuela