Different people have different notions of what stock investing is all about. Before we go any further, we want to put things into focus and set you on the right path.
Investing does not equal trading
Your perception of stock investing may involve highly caffeinated, frantic traders sweating in front of a half dozen computer screens packed with information, while phones ring off the hook in the background.Feel free to dump these images from your mind, because solid stock investing is not about trading, having the fastest computers, or getting the most up-to-the-second information. Though some professionals make their living by creating a liquid market for stocks, actively "day trading" is simply not how most good investing is done by individuals.
Beyond having to expend an incredible amount of effort to track stocks on an hour-by-hour basis, active day traders have three powerful factors working against them. First, trading commissions can rack up quickly, dramatically eroding returns. Second, there are other trading costs in terms of the bid/ask spread, or the small spread between what buyers are bidding and sellers are asking at any moment. These more hidden frictional costs are typically only a small fraction of the stock price, but they can add up to big bucks if incurred often enough. Finally, frequent traders tend not to be tax efficient, and paying more taxes can greatly diminish returns.
Just as someone can be a great driver without being a mechanical engineer, you can be a great investor without having a clue about how the trades actually get executed in the market. How your orders flow from one computer system to the other is of little consequence.
Just remember that investing is like a chess game, where thought, patience, and the ability to peer into the future are rewarded. Making the right moves is much more important than moving quickly.
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Investing means owning businesses
If the mechanics of actual trading mean little, what does matter? Do charts of stock prices hold the answers? We've said it once, and we'll say it again and again: When you buy stocks, you are buying ownership interests in companies. Stocks are not just pieces of paper to be traded.So if you are buying businesses, it makes sense to think like a business owner. This means learning how to read financial statements, considering how companies actually make money, spotting trends and figuring out which businesses have the best competitive positions. It also means coming up with appropriate prices to pay for the businesses you want to buy. Notice that none of this requires lightning-fast reflexes!
You should also buy stocks like you would any other large purchase: with lots of research, care and the intention to hold as long as it makes sense. Some people will spend an entire weekend driving around to different stores to save $60 on a television, but they put hardly any thought into the thousands of dollars they could create for themselves by purchasing the right stocks (or avoiding the wrong ones). Again, investing is an intellectual exercise, but one that can have a large payoff.
You buy stocks, not the market
We've all seen the prognosticators on television, predicting where the market is going to go in the future. One thing to remember when listening to these market premonitions is that stock investing is about buying individual stocks, not the market as a whole. If you pick the right stocks, you can make money no matter what the broader market does.Continued: Nearly impossible to predict
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