- A stock market is an asset exchange where small equity shares of companies, known as stocks, can be bought and sold. By buying a share of stock, an investor becomes part owner in the company that issued the stock. The value of a share of stock, ideally, would be equivalent to the value of all the assets of the company that issued it, divided by the number of shares that exist. Since companies operate in order to make profit and grow their assets, those holding shares of stock in a company stand to gain equity if the company does well.
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Stocks are considered a fairly risky investment because the value of stocks fluctuate constantly based on economic conditions and investor sentiment. For example, if an investor buys shares of an oil company, and consumers shift their preferences toward the use of hybrid vehicles and alternative transportation, the oil company may see a decline in profits, which would likely make their stock value fall.
On the other hand, if investors expected the government to provide a large loan to the auto industry this might cause investors to speculate that the auto industry will do well in the near future. Consequently consumers would buy stock in auto companies, which would cause the value of auto stocks to go up whether the auto industry actually does well as a result of the loan or not. The stock market is a very complex system. Generally stocks trend upward as companies grow and exceed expectations and fall when they see falling profits and fail to meet expectations. But, even expert investors cannot predict all the fluctuations in the market. - The safest way to use the stock market as an investment is to buy stock in a wide variety of companies and hold it for the long term. It is difficult to predict short term volatility in the stock market, but over long spans of time, the market as a whole generally outperforms more conservative investments such as bonds, or savings accounts. By spreading risk across many companies, an investor protects himself against the possibility of a few of the companies he holds assets in performing poorly or going out of business.
