The Up, Down, Up of the Stock Markets

One of the most fascinating creations of mankind is the stock market. A forum for businesses to raise money and investors to make money, the stock markets can make or break individuals and corporations. One bad day could ruin the gains an investor has made over an entire year; however, the stock markets work the other way too. Through savvy investing and proper timing, investors can make large quantities of money in short periods of time.

Market Basics

Stock markets are the loose network of economic transactions that involve companies selling shares of their stock to investors. Each share of stock in a company grants the investor partial ownership in a company. An investor goes into the stock markets to buy or sell shares of stock from a company for a set price. The market has three main purposes. It allows investors to make money; it provides a way for businesses to raise funds; and, it serves as an economic indicator.  When the stock markets are rising, the economy of a country is generally doing well.

Causes of Fluctuations

There are many causes of fluctuations in the stock markets. It is impossible to identify the miniscule details that cause each tiny price change, but overall the price of a share of stock increases if that company is thought to be profitable and decreases if that company is thought to be unprofitable. The stock markets operate on a system of supply and demand.  When people think a company is profitable, everyone wants to own shares of stock in that company so people can sell their shares at higher prices. However, when fewer people want to buy stock, the price drops.

Timing the Market

Most investors make money on the fluctuations in the stock markets through good timing. The key principle to always keep in mind when investing in the stock markets is “buy low and sell high”.To maximize profits, investors want to buy stocks when their prices are low and sell them when their prices are high. These prices fluctuate every second, so awareness of stock market prices is key to making money in the markets.

Predicting the Market

Timing the market is not as easy as it sounds. It necessarily involves the prediction of what the stock markets will do in the future. Since no one can see the future with certainty, no one can know whether or not his or her stock will increase.   For every person who is selling stock, someone is buying stock. There is always someone betting against you. If something is certain, then no one will bet against you. The principle behind the stock market is that there will always bea winner and loser. That being said, steps can be taken to minimize risk.

Risk and Reward

In the stock markets there is an inherent connection between risk and reward. As the risk increases, so does the reward; however, if the risk decreases, the reward shrinks as well. A good investor has a diversified portfolio with some stocks that are risky and others that are less so. Large corporations are much less risky than smaller, start-up corporations.  However, the only way to make truly vast sums of money in the markets is to bet correctly on a small company that becomes the next Microsoft.

Historical Stock Market Prices

As a general principle, stock market prices tend to increase. Over time, businesses grow and assets are created. This is how the world has grown to its current size. However, this does not mean that individual stocks have not historically lost value. For instance, when it entered bankruptcy, General Motors’ stock price was almost zero. Investors lost millions on that one stock. Yet, the sum total of the stock market has increased. Since its inception in the late 19th century, The Dow Jones Industrial Average, an index of thirty American stocks that comprise the largest sectors of the American economy, has increased from less than one hundred points to almost thirteen thousand.

The stock markets are amazing creations that have made fortunes for many shrewd investors; however, they have also caused great ruin, like in the Great Depression in America in the 1930s. If you are able to time the market and buy low and sell high, you will make money and the market will be a valuable tool. With a little guidance, anyone can make money in the stock markets.