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Archive for the ‘Stock Market Activity’ Category

The stock market is a remarkable environment in which to create wealth. This very fact also makes it a perfect tool for the redistribution of wealth. (Seldom has so much wealth been created on our planet so easily by so many and also taken from so many so regularly. )

The very premise of the stock market is one of capital formation. A place where business people can raise money by selling a stake in their companies also called shares. The money they raise is, at least in theory, supposed to expand and grow the businesses they are in. The money they make hopefully goes to making the business more profitable. The more profitable the business the greater the value of the shares they sold to the public should be. As a shareholder you own a piece of the company and its earnings. In the market we compete to own or sell shares of these companies.

When economies are expanding and businesses are making money hiring employees and engaging in commerce things are generally considered good. During these times people are optimistic about the present and future. Investments are made and businesses are begun to capitalize on what they believe will be products or services the marketplace is asking for. When times are good people think of owning stocks as a place to invest or speculate on the prospects for better times ahead.

In seemingly uncertain times such as recessions or depressions there are typically losses of jobs and businesses close their doors because they can’t pay their bills and keep employees on the job. It is not uncommon for stocks to lose value during these times as people begin to lose faith in the present and future. Their attitudes are reflected in their fears and they eventually sell their stocks and other investments to preserve capital and limit their losses. Fear is a great catalyst. When selling begins to accelerate people see the potential for greater losses and sell even if it is at a loss so as to preserve their money.

A nation’s money supply is the principal driving force behind the growth of stock market activity. Without money supply we would have nothing to purchase stock or other investments with. The money supply of all nations is constantly growing as new money is printed, natural resources are harvested, products are made and services rendered to be exchanged for that money in the marketplace.

Without growth in the money supply we would have to find a way to exchange for products and services and bartering is the one way for that to occur. Governments would not be able to easily tax such activities and enjoy revenue so money supply is generated to create wealth for the purpose of taxation

The growth in the money supply is easily recognized by certain factors we see everyday. Most people, over the age of 21 or so, know that gasoline and food items have increased in price over the last several years. If you have paid for a college education you know it is more expensive now than 20 years ago. Yes, you say that is just inflation. Well inflation is generally regarded as a sign that money supply growth has increased and it has filtered down to the consumer being expressed as higher prices in goods and services, generally. If there is a true scarcity of an item then prices are increased until supply and demand more closely balance each other out.

The growth in money supply has allowed more companies to go public and get financing. If money supply had not increased we would not have had the opportunity to grow new business, industry and technologies. Excessive growth in money supply does lead to inflation which is observed in every financial bubble we have created for ourselves. The recent housing and stock market booms in the 1990′s and into 2000 forward were all created with cheap and abundant money.

This growth in money supply and our demand for new goods and services has led many new companies to come into existence. Our appetite for this new and better everything has also fueled the stock market and its inexorable trend higher that began long ago.

The yearly chart of the Dow Jones average indicates how this phenomenon has played out over the last 90+ years or so. (A chart is posted on my new blog) It wasn’t until the late 1990′s that the character of the market changed some and again in 2007-08. Intense speculative bubbles caused both downdrafts in the markets during those time frames. The excess in the markets was being removed and once it was the market was free to move higher once again.

Money supply growth contributed to the market having this amazing run up in asset prices. As expressed in the chart above you can see where with few exceptions the market has been in an upward trend for the last 90+ years. This would not have been possible without growth in money supply. As with all excesses they are eventually corrected and removed from the marketplace.

To participate in the future of economic growth in the stock market one must purchase stock. Over the last 30 years or so mutual funds and retirement accounts have been marketed as places to put your money in to enjoy the benefit of a rising stock market and growing economy.

The reverse of buying stock, to participate in a stock market up move, is to sell short shares of stock. To do so you are in essence borrowing these shares from someone else who actually owns them and then to profit from the transaction you must buy the shares back and replace them. The concept is similar to buying a stock and to profit from the transaction you must eventually sell. The original person whom owns the shares you borrowed will continue to own them and collect the dividends. Not all companies will have shares available to short.

There are many factors that have conspired over the years to encourage an upside bias to the market.

1. Growth in money supply
2. Retirement accounts which purchase stock
3. Executive compensation tied to rising stock price and options
4. Growth in industry to bring new products and services to market
5. Purchasing stock to enjoy dividends (usually better than money market and savings accounts)
6. Fewer incentives to own short stock than long stock

With all the plus’ to own stock one must also be careful to select stocks whose prospects for the future look bright now and as far as you can see down the road. Not all stocks go up for ever and many that shine brightly for a time fall to earth and never regain their star status again.

The “Stock Market” is a term that is often misapplied to what are known as financial “markets” or financial “exchanges.” Although stocks represent only a fraction of the actual monetary value of all the various types of financial instruments (such as government and private industrial bonds, short-term debt agreements, and foreign currency) purchased and sold in the course of any given day, the general public tends to overlook these activities. This section will there fore restrict itself to providing a brief history of the Stock Market in the United States.

There were two major forces that shaped the early of the history of the Stock Market: the founding of the nation itself and the Industrial Revolution.

To finance the American Revolution the government sold bonds, which were agreements that the new American government would repay (with interest) loans made to it by private citizens at some future date. To facilitate the sale and purchase of these bonds it was only natural that those engaged in this activity would meet daily at a designated location. The location agreed upon was beneath a Buttonwood tree located on a small street in lower Manhattan that was informally known as Wall Street, which was named after the fact that the street itself ran in front of what had once been a military barricade.

The arrival of the Industrial Revolution would mark the beginning of the Stack Market as it exists today.

Initially, the Wall Street traders were involved with the sale and purchase of government bonds only but as private industry began to grow in the early 1800s it needed to raise cash in order to purchase raw materials, pay its workers, and to expand. The most efficient way to raise this money was for a business to sell certificates of partial ownership of that business, known as stock certificates, to investors. The bond market traders saw this as a natural extension of their business and were soon making more profit from the sale of stocks rather than bonds. By the end of the 19th century the major stock brokerage firms were among the most profitable businesses in America.

Federal regulation of Stock Market practices, although begun in the early 20th century, did not become a major factor in the market until 1934. In that year, due to the perceived role of the markets in precipitating the Great Depression, the Roosevelt Administration created the Securities and Exchanges Commission to define acceptable business practices within the financial industry and to regulate those practices. As a result, the markets are no longer subject to the extreme instability that once made investing in stocks a very risky undertaking.

No history of the Market would be complete without noting that, today, New York City is the center of the financial industry. The New York Stock Exchange (NYSE) continues to be the primary center at which stocks are sold and purchased. Its smaller competitor, the American Stock Exchange (AMEX) has emerged as the primary market for stocks of relatively smaller companies while the national Association of Securities Dealers Automated Quotation System (NASDAQ), which is a totally “electronic” (meaning that it has no physical structure housing its operations and relies on computer technology to conduct its business), is the primary market for stocks in “start-up” or “high-tech” businesses.

To trade and invest profitably, there are many important things you need to know about the stock market. This article looks into some of the most important rules you need to know to make profit in the stock market.

1. Never trust the advice of your broker unless they have successfully traded their own money for some years.

2. Avoid the mistake of buying at extreme high price. You should only buy stock when the price is relatively low with potential to make profit in the nearest possible time.

3. In the stock market, note the direction of movement of price. Price movement is either up or down. And knowing this will enable you enter the market at the appropriate time to enable you make money in shares through margin trading.

4. Change is constant and this statement is also true for the stock market, and this leads to “the trend always changes rule”. Price may be down in one moment and up the other moment. So, when price goes down against you, do not despair for the price may go up in your favor the next moment. All you need to do is carefully take position to take advantage of share price movement to ensure a profitability of your investment in shares and stock.

5. The extent of change in price in one direction determines the extent of change in rebound or fall. The more extreme the move up or down, the more extreme the reverse once the trend changes.

6. The stock market moves in advance and responds to information such as news or impressive fundamental. You need to be proactive in making investment. Waiting to invest only when the signals are totally clear to you may cost you some relative loss in profit. You need to take position before the long directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative most of the time.

7. Know that the stock market is not human and hence not rational. The market is not capable of generating stimulus for itself, rather, it react to activities and manipulation by the players who desire to make money in shares.

8. Learn to take profits quickly and absolve losses quickly if it arises. Trading discipline is a necessary condition to make money in the market. If you are not disciplined your chances of making money in stock will be greatly reduced.

9. Technical and fundamental analysis helps to predict the potential and profitability of some stock. However, successful market timing is necessary for you to know your entry point and exit point for you to make big money from the stock market.