Basics of Buying Stocks

A friend of mine called me and asked me for advice on buying and owning stocks. The first thing I asked him was who he was getting his advice from now. He told me that he got some "tips" from his friends.

I asked him how well his investments turned out so far. He told me that he hadn't made much money. I pointed out that if he was diversified, he should have been making a great deal of money. What he told me was that it was just bad luck! Sound familiar?

What he was looking for was a particular recommendation to make money on a stock! I told him I couldn't give him one. But I could give him some overall general advice.

First, your friends are the worst people to take stock picking advice from! Your friends don't know anymore than you do!

The second piece of information I gave him was that making money in the stock market is not a one shot deal! Money is made through a series of transactions over a long period of time. There will be both wins and losses.

The object is to cut your losses short and let your winners ride!

After that I explained why the stock market keeps on going up and down. Fluctuations occur partly because companies make money, or lose money.

But it is much more involved than that. A stock is only worth what someone will pay for it. Usually, if a company makes a lot of money, its value rises, because people are willing to pay more for a company's stock if the company is doing well.

There are also many other factors that affect the value of stocks. One example is interest rates, or the amount of money you have to pay a bank to loan money, or how much it has to pay you to keep your money in their bank.

If interest rates are high, stock prices generally go down, because if people can make a decent amount of money, by keeping their money in banks, they feel like they should not take the risk in the stock market.