Editor's note: This is a special excerpt from Jim Cramer's book, Jim Cramer's Mad Money: Watch TV, Get Rich. To order your copy and read all the rules, click here.
Sneak Preview: Know the Markets
2. There's a market for everything; pay attention to it. It's tempting to treat stocks as pieces of paper that represent shares of companies. But that's not how it works. Stocks are pieces of paper that get traded in a market and valued by different investors for different reasons. There are different markets for different kinds of stocks. If you ignore this fact, you're setting yourself up for failure.
If the market gets flooded with a certain type of stock, let's say Internet stocks, then the value of all those stocks will go down. ... You need to pay attention to the fact that there's a market for Internet stocks, a market for commodity stocks, a market for drug stocks, a market for tech stocks, and so on. If the market gets flooded with supply, then just as in Economics 101, the price of everything on the market goes down. By the same token, if supply dries up, say if half the companies in an industry get taken private, then the price of everything else in the industry should go up.
If you ignore this fact about the nature of the market, you'll get burned.
I coined this rule after I was publicly humiliated by the Sealy (ZZ - Cramer's Take - Stockpickr) initial public offering, on April 7, 2006. There's a market for IPOs, a market for newly public stocks, and if you're going to try to invest in an IPO, you have to watch the supply and demand in that market. This is just as important as the stock's fundamentals.
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At the time of publication of this excerpt, Cramer had no positions in any of the stocks mentioned in this excerpt.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on Mad Money at 6 p.m. & 11p.m. ET weeknights on CNBC. Click here to order any of Jim Cramer’s books including his latest endeavor Stay Mad For Life: Get Rich, Stay Rich (Make Your Kids Even Richer). While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here.
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