With the U.S. stock market at its highest levels in six years, individual investors—many of whom were burned during the financial crisis—are developing equity investment strategies, anxious to avoid mistakes from the past. But deciphering the dynamics of today's market is tough. In his latest book, "Get Rich Carefully," CNBC's Mad Money host, Jim Cramer, gives readers advice on how to keep their hand on the pulse of the market, invest prudently and avoid miscues. Here's an excerpt.
If we are to invest successfully in this new, more treacherous environment, we are going to have to recognize the bizarre stock movements have become a staple, if not a hallmark, of this era. Before we can even get to the buying and selling of individual stocks in order to create wealth, we have to understand how stocks are impacted by both understandable events and what seem to be random gyrations that baffle and frighten us.
We have to accept that stock gyrations often don't have much to do with the day-to-day success or failure of the individual companies they are meant to track. Here are the six factors that moves a stock:
- The impact of supply and demand is critical. Is there stock for sale near the current price? Do buyers have to pay up to get their stock in? Do they have to sell the stock down to get their order done? The supply-demand imbalance can control minute-to-minute pricing more than pretty much anything else that's going on.
- Stocks now trade like commodities because index futures have overwhelmed the stocks that are in them, in part because the buyers and sellers of futures are putting an immense amount of money to work in rapid fashion. Stocks can't withstand that power and are helpless in the face of it, as we saw in the Great Crash of 1987 and the Flash Crash a few years ago.
- ETFs have created a homogenized environment among different stocks in the same sector that is often more powerful than the fundamentals of the individual companies. You can't judge a company by its own cover; you have to judge it by the sector's cover.
- Bonds and the Fed matter more than ever because we have now seen the bottom in interest rates and they are climbing, impacting stocks in lockstep, particularly the stocks of higher-yielding equities that had been used as bond market equivalents.
- International influences must be grafted onto your thinking about stocks pretty much on a daily basis because of the electronic linkage of all markets and because the U.S. market is no longer as dominant as it once was.
- Only after you understand all of these other forces, does it pay to consider how the fundamentals will impact the prices of stocks, and the fundamental input we care most about is whether a company is raising its guidance for future sales and earnings. If we find companies that do raise guidance, we need to cherish them, given how little growth there is in the world and how hard it is to find consistent earnings power in this day and age.
If you want to invest carefully, and not just think you are investing carefully, consider this checklist before you buy or sell another stock.
—CNBC's Jim Cramer. Follow him on Twitter @jimcramer.
Text copyright © 2013 by J.J. Cramer & Co. From JIM CRAMER'S GET RICH CAREFULLY, reprinted with permission from Blue Rider Press, a member of Penguin Group (USA) LLC.