A newbie's guide: Stock market – what you really need to know and what is just “nice to have”

Investing in stocks seems to be really complicated if you've never done it before. Many of you may have friends who told you that they made a lot of money by buying and selling shares, others probably have heard stories about people who lost all their money due to a fatal investment. Actually investing in the stock market is not that difficult if you learn some basic concepts.

What you really need to know

News and Common Sense: Before buying some company's shares, make sure you scan the news for any information about that company. Is their business growing, are they having financial difficulties or have their competitors just launched a new product that is likely to have a negative impact on the company's turnover? Use your common sense and don't try to speculate – if you read in the newspaper that an entreprise is likely to go bankrupt soon, then don't buy their shares.

Rating Agencies: There's been a lot of Rating Agencies bashing lately. Ok, they didn't anticipate the bankkruptcy of Lehman Brothers and that they may play an “ambiguos” role in the European debt crisis, but it's also true that you shouldn't buy shares of companies that have bad ratings. The three major rating agencies are Moody's, Fitch and Standard & Poor's.

Balance Sheet and other stuff: Make sure you learn how to read a balance sheet so that you won't have to rely on someone else's opinion of a company. Learn how to calculate the most important balance sheet ratings and what a cash flow is.

Monetary system and policy: You really have to understand how the monetary system of your country works and the effects of your central bank's monetary policy, you need to know the basics. What's going to happen with your share prices if the interest rates rises or falls? Are you likely to lose or win money?

Risk Diversification: Try to diversify your risk by buying companies' stocks that operate in different business sectors. There is a lot of information on risk diversification on the internet.

Stop-Loss order: Make up your mind on how much money you're willing to lose and always set your stop-loss orders accordingly.

Nice to have, but not essential

Day trading and Day Trading Algorithms: Unless you are going to do this for a living and you really know what you're doing, don't try to take part in this (Russian) Roulette. If you want to be a day trader, you need (a lot of time) and mathematical, programming and economic skills.

Technical Analysis: Many of you may have read that Technical Analysis is a kind of “Stock Market Voodoo” rather than a trading technique one should take seriously. I guess that nobody knows if technical analysis is really useful or not (maybe you want to share your opinion on this), but learning some basic inidcators like RSI or MACD may still be worthwhile, even for a newbie (it can help you to decide when to buy and whether a share is expensive or not - I wouldn't rely on them though).

Machine Learning techniques: This quite advanced mathematical “stuff”. These techniques help you to discover hidden patterns and word of mouth has it that they're used by hedge funds. There are many books on Random Forests, SupportVector Machines and Neural Networks out there.

Futures and options: Again, you'll need a lot of time if you really want to start trading with futures and options. Don't do it, you can lose a lot of money.

What else do you think a newbie has to take into account before investing his money in stocks?