Investing in individual stocks is a safer bet if you look at them in the context of a variety of market factors, not just the performance of a particular company. Even if a specific company is performing well, a downturn in its sector can affect its share price. Decisions by the Federal Reserve, new legislation or other external factors that affect the market can also affect your stocks. Understanding some of the basic characteristics of the stock market will help you make more informed decisions when managing your portfolio.
The stock market can undergo wild swings, rising and falling by hundreds of points, with many stocks posting steep gains or losses based on factors having nothing to do with their performance. Interest rate changes by the Fed, housing or employment reports, legislative action and natural disasters all can affect the stock market.
Federal regulations and oversight by the Securities and Exchange Commission help keep the stock market fair and transparent. For example, most companies that issue stock must release quarterly earnings reports, while investors who buy large blocks of stock must report their intentions. Individual trades must meet specific parameters and certain players in the stock market, such as certain types of stockbrokers, must be licensed.
A variety of reporting services provide real-time quotes, last-price quotes, volume and other data. At the end of each day, you can see how many shares of a particular stock traded, its high and low price and other information. As previously mentioned, most publicly traded companies must release detailed quarterly earnings reports as well as annual reports.
For many decades, stock market trades were made by professional floor traders who worked for large brokerage houses. Today, any adult with a computer may buy and sell stocks online or find a personal broker to place trades for him. Online trading accounts are free to open; the broker through which you open an account takes a small fee per trade. Online trading accounts provide small investors with real-time data about the market and offer a variety of additional resources to help you research stocks, sectors, trends and other factors that can help in making investing decisions.
Not all securities sold on the stock market are regulated in the same way. Small businesses that cannot get listed on the big exchanges such as the New York Stock Exchange or the Nasdaq may still sell shares. These businesses provide less public disclosure and are riskier and more subject to fraud. The common “pump and dump” scheme involves fraudsters buying shares of a penny stock, promoting them to unsuspecting investors to drive up the price, then selling the stock to make a quick profit, leaving the other investors holding stock that inevitably crashes.
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