Stock investing may seem intimidating to new investors, but there’s no need for anxiety: learning the basics won’t take much more effort.
The stock market is an exchange where companies offer shares to investors who then buy and sell them at various price levels.
Supply and Demand
On the stock market, supply and demand can quickly fluctuate due to corporate announcements, economic conditions or policy shifts.
Example: When an economy is experiencing growth and corporate profits are on the uptick, demand for shares increases while slowing economies may cause demand to diminish.
Economists define markets by comparing the amount of a good that suppliers are willing to produce at each price with what consumers are willing to buy at each price – this intersection between two curves is known as the market-clearing price.
Ideal markets should offer full competition between buyers and sellers of identical goods; however, situations arise in which certain items differ in taste or production technology or it becomes hard to match sellers with buyers.
Market volatility should always be taken into account when investing. While it can cause panic among investors, market instability also provides opportunities to make more money.
Market volatility can be caused by many different events within companies or sectors, from specific company events to major weather events in oil-producing areas that could impact their stock prices.
Changes to government policies or uncertainty about geopolitical events can also contribute to market instability. For instance, the coronavirus pandemic caused significant stock market losses as governments worldwide implemented extraordinary fiscal and monetary stimulus plans designed to mitigate its economic fallout.
Long-term investors tend to view volatility as background noise and focus more on gradual gains over time than on individual securities’ ups and downs, an approach known as buy-and-hold investing.
Market makers play an integral part of the stock market, helping traders purchase or sell securities at prices they deem suitable. Their role involves setting prices that reflect both supply and demand factors.
Market making requires extensive information, which makes it essential that these firms remain alert to changes in the markets and respond swiftly. Otherwise, market makers could find themselves unprepared and vulnerable when changes take place, leading them to lose money quickly.
Market makers must monitor the bids and asks of more than 300 different stocks at all times, keeping an eye on long and short positions, long/short ratios, net capital impacts as well as how their operations impact it all.
Market timing refers to investing strategies which involve buying and selling stocks at key moments during market cycles, unlike buy and hold strategies which require investors to remain invested through corrections or bear markets.
One common method for market timing is comparing valuations across time or markets, while another approach is fundamental analysis.
Timing strategies may also take into account market sentiment to predict changes to stock prices in the future. When using these strategies to take advantage of promising opportunities, use sparingly as they should have an attractive risk/reward ratio so losses can be recovered more easily.
Market timers sometimes fail to live up to their expectations due to various factors, including behavioral biases, real life reality and difficulty accurately predicting short-term market movement.