Once upon a time that was the best advice you could give or get. These days, not so much.
Today’s economy is complicated, and the factors that would move you to invest in the stock market have changed drastically from as little as ten years ago.
That said, statistics say it’s still the best bet over time.
But before you make that leap, there are a handful of things you need to know.
What is the stock market?
A surprising number of people, even some who are investing there, couldn’t tell you.
The stock market is, in effect, a used car lot for corporate securities. When you buy stock on any of the markets, you’re not buying that share of ownership in a company from that company, you’re buying it from another investor who, chances are, bought it from yet another investor, and so forth.
Which means, with every trade, somebody is right and somebody is wrong. Because the price going forward only has two options – up or down.
Only the original issue of stock results in the proceeds going to the company itself. And while that may not be germane to you as an investor, it is a fundamental principle of ownership that you know.
Otherwise, you’re playing a game you don’t understand.
The more you know about the stock market, the better
You should also know what makes the price of a share of stock move up and down.
At the most basic level, it connects to the financial health and performance, as well as the future outlook, of the company itself. People invest in companies that stand to make money, for obvious reasons.
When a company doesn’t make as much profit as planned, the stock goes down. It goes down even when people simply suspect that will happen. And when the company makes more than planned – yes, that really happens – the value of the stock goes up.
What some people don’t realize is that the stock market is a futures venue as much as anything. People buy and sell based on expectations as much as they do proven performance.
It’s Not a Game of Now, It’s a Game of When
Only unexpected performance dramatically changes the price of a stock, because expected performance is already priced in. The stock market is the purest form of supply and demand on the planet, and people demand stocks they believe will do well.
That’s why you’ll occasionally see a new issue stock in a company that has never turned a profit suddenly go to the moon, based solely on the perception that great things await.
But the company itself isn’t the only influencing factor.
The market also moves on intangible, even illogical factors. This is called technical analysis, wherein the price of a stock reflects the market in general, or whether it’s over-sold, under-bought or when the rating of the stock changes from a trusted source.
All of this can get quite complicated, because these two realms of influence tend to overlap. Company performance is the most basic influence, but the perception that non-related factors will influence that performance – disasters, the economy, the death of an executive, a ratings change, etc. – they will drive the price up or down accordingingly, even though none of that has resulted in one single penny or gain or loss.
So should you invest in the stock market?
The answer depends on what you know, what you want, and your tolerance for the inevitable risk that comes with investing.
The answers are out there. But in the end, the decision is always yours. Even the professionals get it wrong now and then, and the key is to stay ahead of the conventional wisdom on either side of the forecast.
