Elements of the Stock Markets

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    Identification

    • The stock market is a venue where buyers and sellers converge to exchange corporate stocks. While the venue still exists as a physical location in large cities such as New York and London, investors can engage in commerce through the Internet as well. The forum or venue that hosts this type of commerce, such as the New York Stock Exchange or the Foreign Exchange Market, takes a small cut of every stock sold.

    Risk

    • Investing in the stock market is riskier than investing in mutual funds and treasury bonds. Unlike savings accounts, stocks do not guarantee growth and a return. However, the element of risk also presents the opportunity for greater reward. Typically, the more volatile the stock, the greater potential for large earnings or losses. Susan Hirshman, author of "Does This Make My Assets Look Fat?" writes blue chip stocks are industry leaders, established and solid investments: Eli Lilly, General Mills, Coca Cola and Apple are examples. Blue chip stocks are often higher-priced and grow at a slower rate, yet have a history of issuing dividends to investors. Thus, investors interested in yielding a stable return from blue chip stocks must have a large amount of capital to allocate due to the higher stock price. On the other hand, penny stocks are inexpensive, wildly-fluctuating stocks. Investors who do not have a lot of money to spend upfront yet desire a quick return might take a risk and buy penny stocks.

    Timing

    • The most successful stock market investors recognize the importance of timing. Stock returns are maximized when investors buy when the price is low and sell when the price is high. Brokers assess if the price is low by discerning the company's financial information: For instance, a broker might believe a stock is underpriced and buy it when she reads about merger rumors between two companies. According to Jason Kelly, author of "The Neatest Little Guide to Stock Market Investing," assessing stock volume is another way an investor tracks investment potential. If the volume rises, investors take a close look at buying the stock.

      On the flip side, an investor might sell stocks when she discerns the company's debt-to-credit ratio is too high or the business's CEO resigns. Part of timing in the stock market is piecing together information about the company's health before other investors. If many investors choose to sell stock, the price drops dramatically and the broker misses out on gaining a profit. Because the price of stocks fluctuates in seconds, the decision to buy or sell must be made quickly.

    Economic Factors

    • Sometimes, the health of a company has no bearing on its stock price. Economic influences can affect the stock market just as much as a prominent company's quarterly earnings announcement. When the Federal Reserve comments on the state of the economy, changes the nominal interest rate or introduces programs such as quantitative easing, the stock market reacts. Similarly, news related to economic indicators such as unemployment figures, construction sales, retail sales and foreign trade levels also affect the market.

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