The stock market is not different than any other market. A market is a place where people buy and sell goods. People buy and sell stocks in the stock market and the price of one share is determined through the law of supply and demand. People who buy shares of one or more companies are shareholders and their purpose is to make profit.
There are many factors which has an influence on the price of the shares which are traded in the stock market. In general we can say that if many people want to buy shares of a company the price will go up and if only a few wants to buy or many wants to sell these shares the price will drop. There are many economic and political reasons which can influence the behavior of the buyers and sellers of these stocks.
Inflation, recession, a fast growing economy are important factors which cause a change in the price you have to pay for buying shares. The announcement of the Fed of a rise or a drop in the interest rate can cause that the value of the shares will rise or drop. In times of inflation the Fed will often increase the interest rate to lower the inflation. Companies have to pay higher interest rates for their loans and they will make less profit which can cause that they make less profit or even don’t make profit at all.
Shareholders will easier sell their stocks and the value of the shares of most companies will drop. In times of recession or a slow growing economy the Fed will easier increase the interest rate to stimulate the economy. Companies can borrow money on lower interest rates and will make more profit. People will easier buy stocks and the value of the shares will rise.
Political reasons are also an important factor. Problems in the Middle East can cause that oil prices will rise and cause that companies have trouble to make profit. More shareholders will sell their stocks and it is difficult to find buyers of stocks. If the stock market dropped terrible some people consider buying more stocks because the price is low and they will speculate to make profit in a short time.
The stock market is not only for individual buyers; also fund managers of a mutual fund buy and sell shares for the portfolio of their mutual fund. The impact of the actions of these fund managers is much higher than these of individual buyers because their portfolio of stocks is much higher. There are also several indices which indicate the performance of the stock market, for example the Dow Jones, the NASDAQ, the (S&P 500), and many other country or sector related indexes. These indexes represent the evolution of a diversification of several shares which can help you to decide if it is time to buy or to sell stocks.
Shareholders also receive a part of the profit of the company in the form of dividends. Understanding the stock market is not difficult; it is just like any other market. Demand and supply determinate the price of the stocks but many economic factors can cause the price goes up and down. Speculating is also an important factor and systems like options and future can cause the stock market represent not the right picture of the economy. Nodody knows when it is the best moment to buy or to sell.
Investing is the stock market is often a gamble; you can win and you can lose. It is worth to invest money in the stock market if you spread in time and you have enough diversification in your portfolio; otherwise your investment in stocks can be a nightmare if you’ve invested in the wrong companies. Systematic buying of shares will give you the benefit that you don’t always buy on a peak price.