6 Characteristics of the Stock Market

You are not guaranteed to make money when you invest in the stock market. But unlike with savings accounts, certificates of deposit or similar investments with fixed-rate returns, there is no limit on the money you can make in the stock market either. If you sell stock for more than you paid, you record a gain. Sell it for less than you paid and you incur a loss. Either could have tax ramifications.

Just as there is safety in numbers, there is security in diversity. Investing in more than one company's stock could protect you. Should the price of one company's stock plummet, gains in others might minimize your overall loss or perhaps even increase your total return. Mutual funds are popular among investors because they allow you to spread your investment among shares of several companies. You also can diversify by yourself by directly buying shares in different companies.

Mutual funds and investors often focus on stocks with similar characteristics. Income stocks pay large dividends, but their prices do not rise much, according to the New York Stock Exchange’s Learning Center. Established companies with smaller dividends but steady prices are considered blue-chip stocks. Growth stocks belong to young companies that pay little or no dividends but offer greater chances for long-term price increases – or decreases. The prices of cyclical stocks, like those of home builders and automobile manufacturers, fluctuate with economic expansions and slowdowns. Conversely, defensive stocks, such as those of food and beverage manufacturers, maintain their values during recessions.

Number of shares traded, closing prices, the change from their previous prices and the 52-week highs and lows are among the more rudimentary measures of a stock’s performance. Price-to-earnings ratio also is a standard. If, for example, a share sells for $50 and the company earned $5 a share, then the P/E ratio is 10. Investors might buy if they feel the ratio is low and that the price might rise. Or they might sell if they expect the price to soon drop because they consider the ratio to be too high.

Do you see the proverbial glass of milk as half-full or half-empty? Your answer would indicate if you were a bull or a bear. Bears expect the stock market to drop while bulls bet that it will rise. Similarly, when prices generally decline over a prolonged period of time, it is considered to be a bear market. Sustained increases are called bull markets. You might buy or sell stock based upon whether you expect the market to rise or fall.

Easy come and easy go. Investors occasionally push prices of hot stocks or industries, or even the market as a whole, to unsustainable highs. The inevitable bust then follows. For example, stock prices soared for companies that capitalized on the adoption of the Internet in the late 1990s. University of Maryland researchers found that investors poured $880 billion into the telecommunications industry from 1997 to 2002, only to see half of it dissipate within the next five years.