The stock market is always in the news. For some people, it’s a way of life. For others, the stock market is so surrounded in mystery that it’s best to avoid all together.
How the stock market works and why it fluctuates is an important piece of financial knowledge to have, especially since it can relate to your retirement planning and goals. This blog is meant to help people with a low understanding of the stock market get a better idea of how it works, and perhaps feel more comfortable with the risks involved!
First Things First: What Is Owning Stock?
By “investing in a stock,” you are buying partial ownership of a company. Each individual piece of a company’s ownership is called a share, while stock is a collection of shares. The prices of shares fluctuates up and down depending on a few factors.
The goal of owning stock is to profit off its sale. The hope and gamble is that your share’s value will increase past the price it was purchased at. If the stock is then sold off, the difference between what you bought it at and what you sold it for are your profits. If you buy shares and the prices decrease, you cannot make the money you originally invested back. Of course, you can always hold onto a share hoping its price will eventually increase.
What Makes Stocks Rise and Fall?
There are many factors that affect the stock market, but there are two very understandable truths about stock prices.
The first truth is that successful, profiting companies will experience growing stock prices. As a company does well, the value of owning part of that company rises naturally. Any major sign that a company is about to do well – whether it’s news of a new project, merger or acquisition – will cause stock prices to rise due to people’s anticipation of future profits and value growth.
The second truth is the law of supply and demand. Demand refers to how badly people want a particular thing. Supply is the amount of a thing available. Companies are only made up of so many shares so naturally the supply is limited, sometimes referred to as scarce. Supply and demand have an inverse relationship, like an X on the graph. As one goes up, the other has to go down.
As more people demand a stock and buy it up, the supply of stock available decreases. When people no longer demand or want a stock, they sell it off and the supply of stock available has increased. Stock prices are all about what people are willing to spend for them, i.e. their demand. As demand increases so does price, and vice versa.
If people are willing to buy a stock for a high price, there may be someone willing to sell it and make their own profit. If nobody wants a stock, sellers must offer it a lower price to try and get rid of it.
So you can see how these factors work together to create avalanche events of stock trading. Company makes a big announcement, everyone wants to benefit from the future stock price rising, and stock price naturally rises as everyone rushes to buy from whatever supply is available. In the opposite, a failing company will have people selling off their stock. As the supply of available stock grows, the value of each share decreases.
So Why Should You Bother?
While the stock market does involve risk, many Roth and IRA retirement accounts are invested into the stock market. By planning for long term growth, our staff at United Financial can help guide you into low risk options for helping your retirement fund grow over your lifetime.
You don’t have to be a stock market genius to retire, especially with the right help. If you’d like to discuss your retirement plans with an advisor, it’s never too early. The earlier you start, the more money you can accumulate for a comfortable retirement. We have advisors who can listen to your needs and goals and help you create an actionable plan, so visit United Financial today!