Like any other activity that implies buying and selling, the stock market is conducted by supply and demand. For every share you sell, there is another person who is interested to buy it and vice versa, you buy shares that another person sells. So, how you make money through stock market investing? The answer might sound simple, but there are a lot of details hidden behind that simplicity: you make money by buying cheap stocks and selling them when they go up. You lose money when you don’t anticipate correctly that mechanism: for example, you think that one company will perform well so you buy some of its shares, but the company actually has problems so the shares, instead of going up, start going down.
When the economy is growing, people are optimistic, have access to more money and they start investing in the stock marker. Thanks to this mechanism, stock market is performing very well such periods. After the first returns, traders will invest more and more, and the value of the market will continue to grow. However, if the economy starts failing, the stock market has a very quick reaction to this factor. People are trying to get rid of the stocks, because they are afraid not to lose money, but because a lot of people will do the same things, most of the shares will lose an important percentage of the value.
Generally, the stock market reacts very quickly and disproportioned to both situations: economic growth or economic decline. When there is economic growth, the stock will perform better than the rest of the economy. Because investors have access to money, they will invest it in the stock market, and the shares will become more valuable than they should be. In a way, it’s just like the real estate bubble: the prices are very high, without any real reason.
If economic decline occurs, than the stock market lets you know about that in a very painful way. All you have to do is remembering the crazy period which started in the autumn of 2008 and lasted until de spring of 2009, when all the major stock markets collapsed and a lot of investors lost their money. Stock market is influenced a lot by investors’ feelings and their perception about what’s coming next. So, if there are concerns about the state of the economy, the demand for stocks slows down, the prices go down, and from that point the snowball will be hard to stop: practically, a stock market crash will become deeper and deeper, as more and more people will try to sell shares, in order to minimize their losses.
What you can do to minimize your losses chances and to maximize the profits? First, you need to invest primarily on medium and long term, and to pick solid, well-established companies and investment funds, which will bring moderate, but safe returns. If you want to try speculative, emergent stocks, go ahead, but make sure those investments represent only 10 or 15 percents of your portfolio. And the last golden rule is to diversify your portfolio as much as possible.
