Have you ever gotten a hot stock tip and been tempted to buy up a bunch of shares using all of your savings? Before you empty your bank account, take our quiz to learn about stock market trends and their effect on individual stocks. The inevitable fluctuations of the stock market may be a bit too nerve-wracking for your taste.
Though we wish there was a way to predict which stocks will go up and which will fall, there is no magic potion. The best way to predict the market is by studying past trends.
Many diverse factors can affect the stock market. Economic factors such as inflation, energy prices, and fluctuating interest rates can all play a role, as can global factors such as wars and political unrest.
Spikes in stock prices are hard to predict, but by studying the stock's "behavior" over a period of time it becomes easier to know when to buy or sell.
Known affectionately as "the Fed," the Federal Reserve System is the de facto central bank of the United States and is responsible for various financial functions.
When there is inflation, the economy is doing well, but your dollar actually buys less. Inflation is caused by rising prices in response to a growing demand for consumer goods.
When the Federal Reserve raises the interest rate for borrowing money, individuals and businesses spend and invest less. When they lower interest rates, they spend and invest more.
When a company reports high earnings, investors are confident that the company is doing well. When a company shows low earnings, confidence dwindles.
Because gasoline is so central to modern life, high oil prices tend to affect the stock market strongly. People either find alternative modes of transportation or, more likely, cut down on other consumer products in order to be able to continue buying the gasoline they need.
During times of war, investors are understandably wary of spending their money. People tend to hang on to their savings during other types of upheaval as well and the stock market tends to fall in the wake of major economic fraud or crimes, terrorist activity or political scandal.
Bull and bear market are phrases that were coined to describe long-term trends in the stock market that are measured in terms of years. They don't refer to short-term changes in the market.
A bull market is a rising market in a strong economy with low unemployment. Consumers are confidently spending money, which increases business profits and investors want a piece of the action, so they buy stocks, which then drives up stock prices.
A bear market is a market in decline, usually following a sharp drop in stock prices. Even if the market rallies for a while, a bear market tends to keep falling, bottoming out at about 40% lower than when it began.
The worst bear market in United States history began in 1929 and eventually bottomed out at about 90% lower than when it began, only fully recovering with the advent of World War II.
Bear markets appeared during the Great Depression, the Vietnam War, the oil crisis of the 1970s and the dot-com crash of 2000.
Even in a bull market, timing is key. The best way to make money is to recognize the market trends early on and buy stocks at low prices in the hope of selling them later at higher prices.
In the case of a stock trade called a short sell, you borrow stock, sell it, and when the price falls, you buy it back at a lower price, making a profit on the buy-back.
Interest on United States Treasury bonds tend to rise during bear markets, making them a low-risk investment in times of unstable markets.
If you still want to keep your money in the stock market in a bear market, try investing in defensive stocks such as utilities. Their value tends to remain steady even in a bear market.
Historically, the stock market has always made a comeback from bear markets and risen to greater heights than ever before.
The smartest way to invest in the stock market is probably to invest in individual, strong businesses with growth potential. Base your investment decisions on careful research and not on rumors and guesswork.