How to Understand Market Fluctuations
The stock market rises and falls, but over the long haul the value of the market tends to rise. What's up with the fluctuations?
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Instructions
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Know that the stock market is bound to fluctuate. But over the past century, a random collection of stocks would have appreciated in value by nearly 10 percent annually.
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Realize that market downturns can be triggered by a number of events, such as rising interest rates, concerns about labor shortages, and changes in the political or business climate.
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Understand that when interest rates rise, investors tend to pull money from stocks and put it in interest-bearing investments such as bonds.
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Know of current shortages in the labor market can also hurt stock prices. As a result, when the unemployment rate rose in spring 2000, markets rose, as if rising unemployment were good news.
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Consider that politics also affects markets. Investors expressed confidence and Wall Street rallied when the United States began bombing Baghdad during Desert Storm.
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Keep an eye on business news as well. When it became clear that Microsoft Corp. wasn't likely to win its antitrust battle with the U.S. Justice Department, markets sank.
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Bear in mind that markets often overreact to news of interest-rate changes, political changes and labor issues.
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Choose stocks and other investments that you believe are long-term winners, regardless of today's headlines. Be prepared to take occasional short-term losses.
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Tips & Warnings
Avoid reacting to short-term market fluctuations.
Keep a diversified portfolio so that fluctuations in the market don't have a drastic effect on your holdings.
