Over the past few years the stock market has made substantial declines. Some short term investors have lost a good bit of money. Many new stock market investors look at this and become very skeptical about getting in now.
If you are considering investing in the stock market it is very important that you understand how the markets work. All of the financial and market data that the newcomer is bombarded with can leave them confused and overwhelmed.
The stock market is an everyday term used to describe a place where stock in companies is bought and sold. Companies issues stock to finance new equipment, buy other companies, expand their business, introduce new products and services, etc. The investors who buy this stock now own a share of the company. If the company does well the price of their stock increases. If the company does not do well the stock price decreases. If the price that you sell your stock for is more than you paid for it, you have made money.
When you buy stock in a company you share in the profits and losses of the company until you sell your stock or the company goes out of business. Studies have shown that long term stock ownership has been one of the best investment strategies for most people.
People buy stocks on a tip from a friend, a phone call from a broker, or a recommendation from a TV analyst. They buy during a strong market. When the market later begins to decline they panic and sell for a loss. This is the typical horror story we hear from people who have no investment strategy.
Before committing your hard earned money to the stock market it will behoove you to consider the risks and benefits of doing so. You must have an investment strategy. This strategy will define what and when to buy and when you will sell it.
History of the Stock Market
Over two hundred years ago private banks began to sell stock to raise money to expand. This was a new way to invest and a way for the rich to get richer. In 1792 twenty four large merchants agreed to form a market known as the New York Stock Exchange (NYSE). They agreed to meet daily on Wall Street and buy and sell stocks.
By the mid-1800s the United States was experiencing rapid growth. Companies began to sell stock to raise money for the expansion necessary to meet the growing demand for their products and services. The people who bought this stock became part owners of the company and shared in the profits or loss of the company.
A new form of investing began to emerge when investors realized that they could sell their stock to others. This is where speculation began to influence an investor’s decision to buy or sell and led the way to large fluctuations in stock prices.
Originally investing in the stock market was confined to the very wealthy. Now stock ownership has found it’s way to all sectors of our society.
What is a Stock?
A stock certificate is a piece of paper declaring that you own a piece of the company. Companies sell stock to finance expansion, hire people, advertise, etc. In general, the sale of stock help companies grow. The people who buy the stock share in the profits or losses of the company.
Trading of stock is generally driven by short term speculation about the company operations, products, services, etc. It is this speculation that influences an investor’s decision to buy or sell and what prices are attractive.
The company raises money through the primary market. This is the Initial Public Offering (IPO). Thereafter the stock is traded in the secondary market (what we call the stock market) when individual investors or traders buy and sell the shares to each other. The company is not involved in any profit or loss from this secondary market.
Technology and the Internet have made the stock market available to the mainstream public. Computers have made investing in the stock market very easy. Market and company news is available almost anywhere in the world. The Internet has brought a vast new group of investors into the stock market and this group continues to grow each year.
Bull Market – Bear Market
Anyone who has been following the stock market or watching TV news is probably familiar with the terms Bull Market and Bear Market. What do they mean?
A bull market is defined by steadily rising prices. The economy is thriving and companies are generally making a profit. Most investors feel that this trend will continue for some time. By contrast a bear market is one where prices are dropping. The economy is probably in a decline and many companies are experiencing difficulties. Now the investors are pessimistic about the future profitability of the stock market. Since investors’ attitudes tend to drive their willingness to buy or sell these trends normally perpetuate themselves until significant outside events intervene to cause a reversal of opinion.
In a bull market the investor hopes to buy early and hold the stock until it has reached it’s high. Obviously predicting the low and high is impossible. Since most investors are “bullish” they make more money in the rising bull market. They are willing to invest more money as the stock is rising and realize more profit.