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Investing 101: Understanding the stock market

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There are two ways to profit from investing: 1. Buy investments at one price and sell at a higher price. 2. Invest in companies that pay a dividend.

2. Nasdaq

The Nasdaq (which stands for National Association of Securities Dealers Automated Quotations) is also a stock exchange. However, it's different from the NYSE because there's no physical trading floor. There's also a difference in the companies that are traded on the Nasdaq. The NYSE features a smaller pool of stocks from established, well-known companies like Ford (F) and Exxon (XOM). The Nasdaq is weighted more heavily toward newer companies and tech stocks, like Amazon (AMZN), Google (GOOGL), and Facebook (FB). The Nasdaq Composite Index is a market index that measures performance for all of the more than 3,300 stocks2 listed on the Nasdaq exchange.

3. Dow Jones

The Dow Jones Industrial Average (DJIA) isn't a stock exchange; it's an index that tracks the performance of a group of stocks. The DJIA — also know as the Dow — represents the price-weighted average of the 30 largest publicly-traded U.S. companies in the stock market. The Dow is a benchmark for measuring how well or poorly the stock market is doing on any given day.

Making money in the market

There are two basic ways to profit from investing. The first way is to buy stocks or other investments on an exchange, and then sell them at a higher price. Here's a simple example: if you buy 100 shares of stock for $20 each, then sell them for $30 each, you've made $1,000 on your investment. Of course, this is before any tax or commission costs.

The other way to make money in the market is by investing in companies that pay a dividend to investors. A dividend is a payout you could receive (usually quarterly or annually) based on a company's profits and how many shares of that company you own. Dividends are separate from any gains you realize if the value of the stocks you hold goes up. Dividends aren't guaranteed, and not all companies offer them.

How do stocks and other securities increase in value?

If your goal is to make money by investing in the stock market, you likely have one big question: what causes stocks or other investments to increase in value? Stock prices are influenced by a variety of factors, such as:

  • Supply and demand
  • Financial health of the company whose stock you buy
  • Interest rates and inflation
  • Global economic conditions
  • Political developments
  • Investor sentiment

All of these things plus many others can cause a particular stock's price to go up or down, directly affecting the value of the shares you own. Stock traders and analysts tend to focus on fundamentals when deciding which stocks to buy or sell on an exchange.

Fundamentals can be defined as a measure of the company's overall financial health. Companies with good fundamentals — e.g., good cash flow, increasing revenue, profitability, and lower debt load — are typically viewed as better investments because they're more likely to deliver steady returns to investors.

How market swings affect investments

One of the most important things to know about the stock market is that it moves in cycles and is affected by volatility. When the stock market goes up one day, and then goes down for the next several days, and then up again and back down, that's market volatility.

Volatility in stock pricing influences market swings. For example, the announcement of an interest rate hike or a major change to foreign trade policy could send stock prices tumbling. Prices for an entire sector could be driven up if a leading company in that sector releases a stronger than anticipated quarterly earnings report. When a swing happens, you could lose money or get a boost in your portfolio, depending on which way it goes.

A market correction is when stock prices fall by at least 10%from their most recent high. A correction can be measured for an individual stock or bond, but they're usually measured based on the performance of an index, like the DJIA or the Nasdaq Composite Index. A bear market is when stock prices fall by 20% from their one-year high. Investor sentiment is generally negative and a bear market is typically characterized by a broader economic slowdown. At the other end of the spectrum is a bull market, which is characterized by a period of steady increases in stock pricing.

Corrections are generally short-lived, lasting on average three to four months, while bull and bear markets can last for longer periods of time. A correction can be a precursor to a bear market if stock prices continue to fall.

Do your homework

Investing in the stock market offers an opportunity to earn better returns than you might get from a savings account or a CD. But it can also be risky. Don't be afraid to seek out and talk with a professional. A trusted Synovus financial consultant can help you create a sound investment strategy and choose the types of investments that best fit your unique financial goals. Ready to talk with someone to help you get started? Call us at 1-888-SYNOVUS (1-888-796-6887.)


 
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Important Disclosure Information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. NYSE. "Daily NYSE Group Volume in NYSE Listed" NYSE. May 2018. http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3141&category=3 Back
  2. Investopedia. "Nasdaq Composite Index" Investopedia. May 2018. https://www.investopedia.com/terms/n/nasdaqcompositeindex.asp Back
  3. Investopedia. "Correction" Investopedia. May 2018. https://www.investopedia.com/terms/c/correction.asp Back