A stock is a small share that represents an equal part of ownership of a company. The stock market in general is a huge, automated superstore that allows exchanging of stock between buyers and sellers. The Exchanging process that takes place between the sellers and the buyers assists in setting the prices of the shares and facilitates the trading process. In other words, the stock market works the same way as any marketplace; it helps exchanging goods between different parties, setting prices, and operates to minimize the distribution costs. Stock market investing is becoming one of the most important investment decisions, it is considered a very good decision in the long term; this is because it involves risks and returns. In the stock market, your money is at a higher risk than if it was invested in a savings or CD, thus the expected possible returns become higher.
The stock market is always changing and competitive, there are some times where the changes make sense, but on many other times no one can demonstrate the reason for these changes. The supply and demand drive the stock market, the supply is represented by the number of available shares of stock, whereas the demand is represented by the number of shares that are required by investors. For every share that is bought by an investor, it is at the same time sold by a supplier on the other end. There are continuous fluctuations in the stock market, where the stocks within it rise and fall regularly. Many people mistakenly believe that when a specific stock is rising, then it will continue rising in the proceeding period and vice versa, and they make decisions based on this belief. But in fact, following this gut instinct will probably result in purchasing at high rates and selling at low ones. It’s important to understand that when stocks fall, they become less expensive and thus less risky. The same thing takes place when stocks rise; they become more expensive and thus more risky. Many investment writers claim that whenever the stock goes up then it becomes safer, but unfortunately, this is significantly wrong. Buying a stock is very similar to buying at the grocery store, whenever prices increase we get less excited and buy less, this is why when stock prices increase, it is more expensive to purchase the same stock. However, there are rare times where essential information arise and drive the way we value a stock.
In general, the fluctuations in the stock market can cause large gains and losses, but if the time horizon of an investment is sufficiently long, these short term fluctuations will lead to relatively high returns. The stock market is expected to rise quicker than underlying earning during periods of economic growth and prosperity, whereas it is expected to work worse during hard economic situations, political uncertainty, and lower consumer confidence.