Stock Marketing Information
- On the fundamental level, the stock market reflects corporate performances as measured by company earnings. When companies report better-than-expected earnings, the value of their stocks is adjusted higher and when companies report worse-than-expected earnings, the value of their stocks is adjusted lower. In practice, investors use the commonly referred price-to-earnings ratio to gauge the value of stocks against company earnings. The stock market is also forward looking, and will adjust a stock's P/E ratio based on any perceived change in the company's earnings prospect. For example, some growth companies generating little profit currently may be trading at relatively high P/E ratios if investors predict that the companies have much growth potential.
- In daily trading, the stock market takes into account many risk factors out of investor speculation on various news development about the economy, the market and individual companies. Sometimes, related political and cultural changes may also affect the stock market. Contrary to investors who put their capital on company business fundamentals for the long haul, speculators bet their money on potential stock market reactions to particular news events in the short run. Returns from short-term market fluctuations can be both rewarding and risky.
- The stock market may deliver different results for investors with different investment time consideration. In general, the longer investors hold their stocks, the safer their investments and the more certain their investment returns. On the other hand, the more frequently investors trade their stocks, the riskier their investments and the more fluctuations on their investment returns. By investing longer term, investors likely have the opportunities to recover losses from earlier times.
- Market diversification helps balance risks and returns among different investments. The stock market as a whole is the most diversified investment portfolio that investors can possibly construct. The general market may be appropriately represented by any particular market index depending on the intended focus, such as the S&P 500 or the Dow Jones Industrial Average. Broad market diversification is best served by purchasing a related index fund, as investors cannot conveniently buy all the stocks in an index at once themselves. But investors can design a personalized portfolio that may spread the capital between both risky and safe investments to guarantee a base return, but also catch any potential top gains.