Become familiar with the stock market

The stock market is where shares of publicly traded companies are bought and sold. Stock prices reflect investors’ sentiment on the over all markets and the companies’ outlook. Because the equity markets tend to discount news for the immediate future, the stock price reflects the company’s profit prospects, its financial health and competitiveness. Companies with capable management who has a record of delivering stellar profit results will trade at higher stock valuations.

An appreciating stock price reflects the company’s success in growing their sales and profits. They have kept their offerings unique and competitive. As a result, these companies enjoy pricing power and even a low cost operating structure. These companies are also the top players in the industry they operate in, and are rapidly grabbing business away from their competition. They are rewarding their shareholders with rising dividend payments on top of a higher stock price.

In addition to company specifics, stock prices are also influenced by general economic and even political developments. Macro economic forces such as interest rates will affect stock valuations. If interest rates are high, investors will gravitate towards bonds where they can earn an attractive rate of return. Stock valuations in this situation tend to be lower. The reverse occurs when rates are low. Investors are willing to take more risks to get a higher return.