An Investor's Guide to the Stock Market

By Brandon

Stock market ups and downs are a steady staple in the scripts of radio and television financial news anchors.

While the average investor has a rudimentary understanding of the processes involved in making the market run, the vast majority fail to recognize the inner workings that would help them to become so much more successful.

What is the Stock Market?
The market is little more than the sum total of the transactions involving securities that are traded on a daily basis. Stock exchanges facilitate the actual trading operations. The most famous stock exchange is the NYSE (New York Stock Exchange) on Wall Street. In 2008 - at this facility alone - daily trades averaged $153 billion.

Other notable stock exchanges include the London-, Hong Kong-, Tokyo- and Toronto Stock Exchange. The Paris Bourse and Deutsche Börse are other heavy hitters with respect to influencing the overall profitability of market transactions.

Who are the Market Traders?
Investors recognize that stock market traders are usually experienced stock brokers and high-profile trading companies. While this is true in theory, it is crucial to recognize that virtually every American is invested to some extent in the market. For example, employees with a 401(k) look to successful securities investments to see their nest eggs grow over time.

Municipalities, insurance companies and banks are also heavily invested in the market to grow their capital. Pension funds in particular entrust their clients' future net worth to hopefully prosperous stock trades.

Does the Benefit Outweigh the Risk?
As even the casual investor realizes, there is a substantial risk associated with investing in the stock market. Well-documented cases of here-today-gone-tomorrow companies underscore that there are few guarantees when it comes to investing in securities.

Case in point is the day when Washington Mutual Bank went bankrupt and was taken over by Chase. In this particular transaction, stock holders were the types of creditors that lost the most. The average recapture of bad investments frequently only amounts to pennies on the dollar - if that much.

With that being said, the fact that the market enables companies to quickly raise substantial amounts of liquid capital is an attractive feature. It not only helps businesses to grow quickly but actually provides the lifeblood to much of today's corporate landscape. Individual investors also benefit from the ability to liquidate stock certificates at a moment's notice, which can provide emergency cash for unexpected bills or big-ticket purchases.

Of Bulls and Bears
Attentive investors regularly hear news about bull- and bear markets. The science behind these designations is as complex as its implications are simplistic. A bull market generally denotes investor behavior that displays confidence in trading. Market analysts note an increase in trades and money being put into the stock exchanges.

The bear market is the exact opposite. It shows a suddenly skittish behavior by investors; they pull money out of the exchanges, dump ill-performing stocks and overall feature a marked decrease in risk appetite. As a result, securities prices fall by about 20 percent in just a few short weeks.

Since bull- and bear markets stem from - and translate into - behavioral changes of traders and private investors, the results are frequently upon the investor before the trends compute. Although impossible to avoid, it is feasible to ride out these fluctuations by sticking with sound investments for the long haul or over a number of bull- and bear markets.

What is the Secret to Stock Market Success?
It is foolhardy to believe in any of the supposed market secrets that quickly net the investor unbelievable riches. In general terms, financial success is a mix of dumb luck, a long-term investment strategy and a well-diversified portfolio. Investors can further decrease their risks by avoiding certain investments and trading behaviors that carry the highest levels of danger. Examples include day-trading, penny stocks, crop futures and initial public offerings.