Understanding the stock market sure can be difficult these days. With so many so-called experts on Wall Street on all the news channels talking about what the stock market averages did today, or what they will do in the future, it all can sound pretty confusing. “Buy gold”, “sell gold”, “day trading”, “puts”, “calls”, “pot stocks”, “penny stocks”, “IPO’s” ………. all the terms can sometimes get in the way of understanding the stock market for the average investor, particularly if you have just started investing.
But there is an easy way to understand the stock market if you stick to the basics. Buying and selling stock does not need to be intimidating.
The stock market is a way for average investors like you and I to have a partial ownership in “public” companies. These public companies are required to disclose a lot of information on their financial performance every quarter and in exchange they are granted access to the investing public who can buy and sell shares every day.
Understanding the stock market also involves understanding how companies are valued. Generally, companies are valued at a multiple of the earnings and/or the cash flow they generate each year. The higher the growth in earnings and cash flow, the higher the multiple.
The supply and demand for stocks of individual companies will have an impact of their valuation. Higher demand for a stock will drive the price up and lower demand for a stock will drive the price down. Lower supply of a stock will drive the price up and higher supply will drive the price down. These laws of supply and demand are true for all commodities and stocks are no different.
There are many options when investing in stock market, so part of being successful is understanding options in the stock market that are available to you based on your investment style. Do you need current income, so a stock that pays a dividend is attractive? Or if you don’t need current income, that will significantly increase the stocks that are available for your needs.
There are many ways to invest your hard-earned dollars and the stock market is just one of them. You may find that stocks are not attractive to you after all and you are better investing in bonds or bank certificates of deposit.
Understanding the stock market also means knowing a bit about its history. The earliest stock markets in the United States date back to the 1790s and there has been a lot of turbulence along the way.
The average annual return in the stock market over the last 100 years is approximately 9%, however along the way there have been some anxious times due to significant pullbacks. The Great Depression of the 1930s, the burst of the dot.com bubble in 2000, the Great Recession of 2008 and 2009 and finally the COVID 19 scare of 2020 all created massive short-term reductions in stock prices. While not all stocks recovered from these pullbacks, the market averages in general have mostly recovered subsequent to these events.
Understanding the stock market also involves thinking about where the stock market is heading in the years ahead. We live in a time where the world is changing very quickly and successful investing includes anticipating where we are heading.
We seem to be moving away from using fossil fuels, so would investing in solar energy companies be appropriate? We are all using technology more than ever these days, so is investing in technology companies a good trend going forward? Other trends around artificial intelligence, space exploration, ecommerce and social responsibility are ones to consider for potential stock market investing.
Regardless of your needs, when you buy stocks it can be rewarding for folks over the long run. But understanding the stock market and the individual companies you want to invest in is more important than ever.