When people hear that I am an economist, I often get asked for advice for buying and selling shares; I don’t know why because I am completely hopeless at knowing which shares to buy. To be honest, I don’t buy any shares for the very good reason that I don’t have any money to invest. If I did have any money, I would probably get a copy of the financial times and use a drawing pin. So when I’m asked about shares I usually feel a slight sense of guilt as I wax lyrical about interest rate futures, and Price to earnings ratios – trying to sound knowledgeable without actually giving any particularly useful advice.
When investing in the stock market it is worth bearing in mind.
The majority of people who invest in stock market are professional investors or those taking advice from professional investors. If you buy shares, basically you are hoping to beat the market, which is all the professional investors. The market is competitive meaning that the current price of shares reflects the value placed on them by shareholders. If you hope to beat the market, it basically means that you think you know better than all the other professional investors. If you think certain shares are going to rise by 20% higher than the market, it means that you think the current value placed on the shares is wrong and you know better. The truth is, it is difficult to know for sure that shares are wrongly valued unless you have some inside information not available to other investors on the market. It is for this reason that trading using inside information is illegal (even if difficult to spot)
If the information is freely available, in theory everyone should be able to draw the same conclusions about investment as yourself. It is possible that the market can be hopelessly wrong, for example, the market may get caught in a speculative bubble that you can see through. But, this is easier to say after the event.
Long Term Investment
When buying and selling shares, there is a lot to be said for taking a long term view and ignoring short term fluctuations in prices. If you seek to buy and sell for every fluctuation you will just be liable to lose money on the transaction costs of selling shares.