The Fundamentals of Stock Market Investing in the Twenty-First Century

Abstract

This chapter discusses the fundamentals of stock marketing investing in the twenty-first century. In a nutshell, this chapter seeks to provide a fundamental understanding of stock market investing to interested laypersons across the world. It examines the various issues of critical importance in stock market investing. It dissects the experience of beginners, the most vulnerable participants in the stock market, and equips them with some knowledge cushion. It discusses several strategies for managing the various pitfalls inherent in stock market investing. Finally, it discussed the revolutionary impact of technology on stock market investing.

1. Introduction

This chapter delves into the basics of investing in the stock market during the twenty-first century. It seeks to give a basic comprehension of stock market investing to individuals worldwide who are interested in stock market investment. The chapter covers various crucial aspects of stock market investing and offers guidance for beginners, who are often at risk in making stock investment decisions. It provides strategies for navigating the challenges in the stock market. In addition, it explores the transformative role of technology in the world of stock market investing in the twenty-first century.

2. What is stock market investing?

To properly understand the concept of stock market investing, it is important to have a good grasp of what the stock market is. The stock market is the market for trading or making investments in stocks. It is sometimes referred to as the equity market and is a pool of financial organizations where regular buying and selling of shares and securities occur [1]. Therefore, simply stated, stock market investing is a process of buying and selling stocks or buying and selling ownership in a company, as purchasing the stock of a corporation entitles an investor to own part of the corporation, with money-making or money-loss potential.

Stock market investing is closely associated with stock market forecasting, as investors naturally have the tendency to want to forecast the movement of the market when investing. Stock market forecasting is an attempt to predict the future value of an individual stock, a particular sector, or the market as a whole (Capital.com, 2023)¹. These forecasts generally use fundamental or technical analysis to determine the direction of a stock, a sector, or the market. Fundamental and technical analysis are two major schools of thought for researching the movement of stock prices in the market, yet they are at opposite ends of the spectrum [2]. Further discussion will be provided on fundamental and technical strategies later in this chapter. To predict the movement of the market, an investor must be adequately informed. Accurate stock market models can equip investors with the information they need to make productive decisions [1], but inexperienced investors might lack the expertise of engaging such pieces of information to their advantage.

3. Stock market strategies for beginners

Strategies for stock market investing are becoming increasingly complex as advanced technology and new analytical tools become available in the stock market. For beginners, this could be highly convoluting, as these novices strive to forecast the direction of the market. Stock market price forecasting is a complex task even for market experts, let alone novices. The exercise is considered difficult due to its chaotic nature, and the presence of numerous factors that could frequently alter market predictions [3].

Traditionally, most investors rely on some basic tools such as intuition and perception to guide their decision in stock market investing. More informed investors rely on scientific strategies such as fundamental and technical analysis to make decisions. Fundamental analysis evaluates stocks by attempting to measure their intrinsic value, studying everything from the overall economy and industry conditions to the financial strength and management of an individual company’s earnings, expenses, assets, and liabilities [2]. On the other hand, technical analysis is focused on examining statistical trends, such as movements in a stock’s price and volume, with the assumption that all known fundamentals are already factored into the price, and therefore should not affect investment decisions [2]. These differences are due to the basic principle from which the two schools of thought emanate. Technical analysts consider all external factors instantly reflected in the share price, as opposed to fundamental analysts, who believe that it takes some time for it to happen [4]. Therefore, fundamental analysts believe that there is an opportunity to take advantage of the market and make profits at a time when the price has still not reflected every available company-related information [4], while technical analysts simply do not subscribe to that notion.

Fundamental and technical analysis differ in terms of their approaches and purposes. Technical analysis is primarily used for trading, while fundamental analysis is used for investment. Investors typically use fundamental analysis to buy and hold stocks for an extended period, while traders use technical analysis to make short-term profits. Although they may seem similar, they are essentially different schools of thought with distinct approaches. Fundamental analysts rely on financial statements to evaluate a stock’s intrinsic value, whereas technical analysts rely mainly on price movement or time series forecasting, which has gained much attention from researchers [5]. While fundamental analysts analyze complex information beyond financial statements, technical analysts believe all the necessary information can be obtained from charts, which are the trends. For fundamental analysts, if a stock is trading below its estimated intrinsic value, it is considered a good investment. Technical analysts would prefer to chart out the trend before making such a conclusion. There are several other methods for forecasting stock market movements, which could be associated with either fundamental or technical analysis schools of thought. Omar et al. [6] used random forest and deep neural network models; Challa et al. [7], used the Auto-Regressive Integrated Moving Average (ARIMA) model to predict the variation in returns of S&P and other stock exchanges. Sable et al. [8] used the genetic algorithm to detect the direction of the market.

Traditional fundamental and technical approaches for stock forecasting for investment decision-making are sufficient for beginners. The method that a novice investor chooses will depend on the intention and purpose of the investor. If the focus of the investor is to short the market or engage in momentum investing to make quick profits, the investor should consider using the technical approach, while the fundamental method should be engaged if the investor plans to buy and hold to appropriate the potential value growth in the stock [1].

4. The benefits of using stocks as investment vehicles

Experts from financial institutions and the academic community generally agree that several benefits exist in stock market investment. The Royal Bank of Canada [9] posited that stocks can be a valuable part of an investor’s investment portfolio and that owning stocks in different companies can help the investor to build savings, protect their money from inflation and taxes, and maximize income from their investments. Investment in stocks has the potential to generate long-term returns that can significantly outperform other types of investments [10]. Stocks also offer a great way for investors to diversify their portfolios and reduce the risk associated with other types of investments.

In addition, investing in stocks is a great way to build wealth over time and create a passive income stream. Furthermore, stock market investing provides opportunities for investors to be part of a company’s growth and success. Investors have the potential to profit when a stock price goes up. Finally, investing in stocks could enhance an investor’s propensity to learn or be educated about current events and trends in the market. This is because by keeping an eye on the news and tracking the performance of companies, an investor could stay up to date with the latest developments in the market and potentially capitalize on opportunities.

5. Avoiding investment pitfalls, while taking advantage of opportunities

It is generally a fact that investing in stocks could potentially provide investors with opportunities to make money from the stock market. However, it could also result in a loss of funds. It’s important to be aware of common mistakes that investors make and try to avoid those mistakes, as they could increase the chances of investment loss.

One of the most common mistakes is buying stocks without prior research. It’s important for an investor to understand the risks associated with investing in stocks and have adequate information about a company’s fundamentals before making investment decisions. A proper understanding of the fundamentals of a stock and the company would enable an investor to make an informed decision. Another common mistake is buying stocks on the margin. Buying stocks on margin involves borrowing money from a broker to purchase stocks. This can be a risky strategy and should only be used by experienced investors. Beginners should avoid margin purchases no matter how appealing such transactions might be, until such a time that they have a better understanding of stock market trading or investments.

Furthermore, beginners should avoid emotional purchases or buying stocks on the spot or under the pressure of sentiments. Sometimes, it’s easy to get caught up in the excitement of buying and selling stocks, but a novice investor should always make an investment plan and keep to the plan to avoid making rash decisions [10]. It is also important for novice investors to begin investing with an amount of money that they can afford to lose without inflicting a major negative change to their lives. This is the concept of little money investing. There are several ways to start investing with a little money. One way is to open a no-fee brokerage account. This kind of account allows the novice investor to invest without paying a commission. Another way to start investing with little money is to buy fractional shares. Fractional shares allow investors to buy a portion of a stock, thereby enabling the investors to diversify their portfolio without having to invest a large amount of money [11].

Little money investing can help investors to own different stocks, thereby enhancing diversification, and reducing portfolio risk. It can also help investors to participate in different investment options in addition to stocks. Such investment options could include bonds, mutual funds, and Exchange Traded Funds [12]. While stock purchases represent ownership in a company, bonds are debt instruments, because the buyer of bonds is basically a lender to the issuing company (SEC, Undated). Mutual funds and ETFs are collections of stocks and bonds. This investment vehicle allows novice investors to invest in diversified portfolios.

Finally, an inexperienced investor should avoid a one-time large-chunk investment and instead engage in regular little investments spread over a period. This is the concept of dollar-cost averaging. This strategy involves investing a set amount of money on a regular basis, which can be a great way to build a portfolio over time without having to invest a large amount of money upfront. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of volatility on their portfolios [11]. This helps to minimize the challenges associated with investment timing. The strategy eliminates the effort required to attempt to time the market to buy at the best prices [11].

6. Technology: the revolution for stock market investments

Technology has transformed the financial market, revolutionizing the way investors handle their portfolios. This change has been fueled by advancements in areas like artificial intelligence, big data, analytics, and machine learning [13]. As a result, financial markets have become more efficient and accessible than ever before. While automated trading systems and real-time market data have been around for decades, the recent availability of data and sophisticated algorithms have enabled investors to make quicker and more informed decisions [13]. There are now numerous online tools and applications that make it easier than ever to invest in stocks. There are also numerous platforms offering various resources for investment in the stock markets. Applications such as Robinhood and Acorns allow investors to buy and sell stocks with just a few taps on their phones [4]. In addition, there are now several robo-advisors that help investors to invest in stocks without having to do research [13]. Technology is making it easier to track investment performance. There are several websites and applications that allow investors to track their portfolios and monitor the performance of their investments. With the help of technology, a growing number of investors can make informed decisions and have better control of their investments.

The evolution of technology has brought about a fresh wave of investment opportunities, revolutionizing the way investors invest. This has resulted in a more efficient, transparent, and accessible investing era. Besides, the advancement in technology has given rise to digital assets and cryptocurrencies, which have opened doors for investors to diversify their portfolios [13]. Consequently, financial markets are now accessible to more investors, including those who previously found them complex and hard to penetrate due to high entry barriers.

As technology advances, the financial markets are also expected to undergo significant changes. Investors who leverage these advancements to their advantage will benefit from the new investment landscape. It is highly likely that the financial markets of the future will be quite different from what we are familiar with today, with technology driving these changes [13]. The potential of these advancements in the financial markets is enormous, and they are expected to continue to disrupt and transform the investment landscape. Technologies such as blockchain, IoT, and AI are anticipated to gain increasing prominence in the financial markets, potentially revolutionizing the way investors manage their portfolios and make investment decisions [14].

It is crucial for investors to remain up to date with the latest technological advancements to stay ahead in the financial landscape. By keeping themselves informed about the opportunities presented by innovation, they can make the most of their investments and benefit from the ever-evolving financial markets [13]. Technology is leading the way and investors who are adaptable and flexible are likely to reap the benefits of new opportunities. Staying informed and connected with the technology-enabled financial markets is essential for investors who want to stay ahead of the game [13].

7. Conclusion

For beginners, investing in stocks can be a daunting process. It’s critical for novices to understand the basics of investing and do a bit of research before they get started. It is also crucial that they create a plan that outlines their goals and risk tolerance, and those must be compatible with their overall financial situation [15]. In addition, it is important that they understand the different types of stocks, the terminology associated with the stocks, and the different strategies they can use to invest in the stock market. The stock market can be very volatile, due to its random walk behavior. It is largely unpredictable and so it’s important for investors to be prepared for both short-term and long-term fluctuations. This can be very disorienting and catastrophic for beginners. To minimize this impact, novice investors should consider engaging professional brokers for their investment needs, at least for some time.