Page 184 - Initial Public Offering - An Introduction to IPO on Wall Street

A market maker is a broker-dealer, who, by publishing bids and asking prices and preserving
an inventory of securities, makes it easier to trade shares. It ensures ample market liquidity
for a specific (set of) share(s) and profits from the spread between the bid and asking price
quoted by it.

12.2 Principles
The following are some basic concepts of stock investment that can minimize risk and out-of-
pocket costs, which can minimize the likelihood of major losses and raise the likelihood of
steady returns.

12.2.1 Diversify
If the business that issued the stock performs badly, any given stock tends to lose much or all
its value. If you put so much of your money into a single corporation, if that business fails,
you might lose a large proportion of your net worth.

Diversification defines the allocation of capital across several different assets to minimize
risk. The effect of a few poor investments can be minimized by purchasing stocks in several
different sectors and countries to diversify stock holdings.

12.2.2 Buy and Hold
Depending on investor demand for securities, stock prices rise and fall up over time. Stock
prices usually follow corporate earnings in the long term. However, prices can vary in the
short term because of all kinds of factors affecting sentiment in the market, including natural
disasters, economic circumstances, and politics.

Purchasing and holding stocks for the long term offers the benefits of positive trends over
many years or decades while evading the short-term volatility of the market. To make short
term gains, professional stock traders often trade stocks in the short run, but doing this
frequently is a risky practice that typically results in big losses for new investors.

12.2.3 Limit Taxation
Federal taxes, particularly if you don't invest for the long term, may take a big chunk out of
stock gains. Gains you know are taxed at the usual income tax rate on stock holdings held for
a year or less, while profits on stocks you keep more than a year are taxable at a top rate of 15
percent.

Holding assets in a tax-deferred retirement fund such as a 401(k) plan or individual
retirement fund can also reduce taxes. In tax-deferred funds, you don't pay taxes on any
profits on investments. However, you typically owe income tax on withdrawals after
retirement.

12.2.4 Employ Risk Management Strategies
You need to employ risk management techniques when trading in the stock market because it
is extremely vital not to lose your principal. An investment return killer is portfolio
uncertainty. You will suffer heavily in bear markets if you do not control risk. One of the
preeminent investment guidelines should be to avoid major portfolio devaluations.

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