What Stock Market Returns to Expect

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Stock market returns rely solely on what types of investments you choose.  The riskier the investments, the more you can gain or lose in any year.  However, if you are investing for a long time horizon, then more risk will almost surely mean higher returns.  Also note that this assumes you invest in a diversified portfolio (i.e. not just one stock).  For example, if you invest in Company A, which is developing a new technology that hasn't yet caught on, you could make 1000%s or you could easily lose it all in just one year.  If you held this stock for 10 years, you could end up losing money all ten years.  On the other hand, if you bought Company A and 20 other companies like it, you could still lose or make quite a bit of money the first year, but you would not make 1000%s or lose it all.  And in the long run, these stocks together should make you money.

There is no hard and fast rule as to exactly what to expect when you invest.  And because the amount of risk you take in your investments can also not be measured accurately, it is even harder to know what type of returns to expect.

Here are some rough guidelines as to what type of returns to expect.  Remember, the opportunity to make more money also means the opportunity to lose more money.

Savings Account, Certificates of DepositBonds, Large Established StocksEmerging Stocks, Speculative Stocks

1 Assumes a diversified portfolio of similar investment types or a mutual fund of that investment type.

2 Assumes an investment period of approximately 1 year. These expected returns are based on historical results and actual results could vary by even more.

3 Assumes an investment period of at least 10 years. Any given year could fluctuate dramatically.

 

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Stock Market Investing FAQ

Sometimes the best way to learn about stock market investing is to ask questions.  Here are some frequently asked questions that may help:

Why is the Stock Market a Good Long Term Investment?

It's all about risk and return, and because your money is at more risk in the stock market than if you park it in a savings or CD (by the way, the money you invest in a CD is probably reinvested by the company offering the CD), the potential return is higher. It's true that the gyrations in the stock market can cause both large losses and large gains, but if your investment time horizon is long enough, these short-term fluctuations will result in relatively high returns. It is generally accepted, that the average long term return from investing in stocks is 10-12%. This is much higher than the average CD or savings rate of 4-6%.

Why does the Stock Market Get out of Whack with Reality?

Over the long term, the stock market is driven by underlying economic, financial and global growth. But in the short run, the market is driven by simple greed and fear, which are dictated by human emotions. During periods of prosperity, the stock market often rises faster than underlying earnings. During tough economic times, political uncertainty, and low consumer confidence, the stock market often performs worse than the underlying fundamentals predict.

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How the Stock Market Works

The stock market is driven solely by supply and demand. The number of shares of stock available for sale dictates the supply and the number of shares that investors want to buy dictates the demand. It's important to understand that for every share that is purchased, there is someone on the other end selling that share (or vice versa).  When people's views of the stock market or individual stocks change (which can be driven by economic fundamentals, consumer confidence, fear of terrorism, or company earnings), the demand for stock changes.  This also causes the prices to change.  For example, if people in general believe that the economy is growing, they become more optimistic and want to own more stock.  This increases the demand for stock.  At the same time, since people are selling less stock, it also decreases the supply of stock for sale.  Both of these factors cause the average stock price to rise.

In essence, the stock market is really just a big, automated superstore where everyone goes to buy and sell their stock. The main players in the stock market are the exchanges. Exchanges are where the sellers are matched with buyers to both facilitate trading and to help set the price of the shares. The primary exchanges are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and a few other regional exchanges like the American Stock Exchange and the Pacific Stock Exchange. Years ago, all of the trading was done through the traditional exchanges (like the NYSE, American and Pacific Exchanges) but now almost all of the trading is done through the NASDAQ, which uses ECNs and thousands of other firms with access to the NASDAQ to facilitate trading.

To give you a better idea of what happens behind the scenes, here's an example of one of the many ways that the stock market works:

You open an account with E*Trade. You send E*Trade a check for $1,000. E*Trade deposits the check into a trading account that is listed under your name. You log onto E*Trade and place an order to buy 100 shares of a stock in Company A, which is currently trading at $5. E*Trade uses it's network to tell the NASDAQ and all of it's related networks that there is demand for 100 shares of Company A's stock. The NASDAQ finds someone who is willing to sell 100 shares of Company A and, instantaneously, they execute the trading of stock between you and the person selling the shares. The trade information is sent to a clearinghouse where the information is processed and the shares will now be registered to you. Basically, the clearinghouse will designate 100 shares of Company A to E*Trade and E*Trade will designate those 100 shares as yours. The actual stock certificates are typically held "in street name" at the brokerage and never really need to exchange hands (although you could request that the stock certificates be transferred to your name and held by you).

In a nutshell, that's how the stock market works. It's really just like any other marketplace - it facilitates the exchange of goods between interested parties and works to reduce distribution costs and set prices.

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The Stock Market and Stock Market News

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AppId is over the quota

A stock market or equity market is a public entity for the trading of company stock (shares) and derivatives at an agreed price. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. Participants in the stock market include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares. Their orders usually end up with a professional at a stock exchange, who executes the order of buying or selling.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter verbal bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, usually with long family histories to particular corporations. Over time, institutions such as pension funds, insurance companies, and mutual funds have become the major players in the stock market. The rise of the institutional investor has brought with it some improvements in market operations. One improvement is that fees have been markedly reduced for the 'small' investor.

Stock markets provide a considerable amount of information daily. And the rise of small investors in the stock market has led to an increased demand for the News. The news analysis consists of the tracking, recording, analysis, and interpretation of the flux and change of it. Such analysis could include the performance of well-known and not-so-well-known companies. This form of journalism can also cover news and features articles about the people, places and issues related to the stock market in particular and the financial industry in general.

Stock market news is disseminated in a variety of ways. Most newspapers, magazines, radio, and television news shows carry a segment dedicated to the trends of the trading day. However, the internet has fast become the medium of choice for a considerable number of stock market news watchers. On the internet, such persons can get not only up-to-the-minute reports on trading, but also detailed and in depth financial journalism.

For more information about stock market news please visit Stock Market News

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Why Is the Stock Market Improving?

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AppId is over the quota

After months of going nowhere fast, the stock market is looking like it wants to go higher. The S&P is now within striking range of summer 2011 highs after hitting a low of 1074 back in October.

Why the sudden change in direction?

First, corporate earnings have been well received. Apple itself had a blowout quarter, getting a very positive market response, and now has the distinction of being the highest market cap stock in the world, neck and neck with Exxon Mobil.

Next, the market senses an improving (albeit slow) economy, with weekly jobless claims remaining under 400,000 for a number of consecutive weeks now. We're also seeing an improved manufacturing picture and consumer sentiment has been improving as well.

Also, there has been considerable technical improvement in the market. Specifically, important indicators that technicians watch have gotten markedly better. For example, in early October of last year, the 20 day moving average on the S&P - that is, the average closing price for the preceding 20 day period - crossed above the 50 day moving average for the first time in a number of months, which was a very bullish development. Additionally, the 20 day crossed above the 200 day in early January, another bullish signal and resulting in a move higher.

We've also seen the yield on the 10 year treasury bond move up from a December low of 1.8% to as high as 2.09 on January 23. This move in yields indicates investors are willing to take on more risk, benefiting equities.

Another key development has been the decline in the Volatility Index, or the "VIX" - commonly referred to as the "fear meter." The VIX has gone from a reading of over 47 in early October to just over 18 in late January. That is a significant shift in thinking, and indicating more willingness to invest in and trade stocks.

Everything I've laid out has resulted in a better market picture, but can it last? Where might the market be headed?

Some will say we are in an election year, and that will influence market behavior. That might be true, but there are always events, some out of the blue, that can impact market performance. So, we pay more attention to what the charts and historical data tell us, with the belief that the market is always looking forward, and charts never lie.

It doesn't really make sense to try to predict where the market will be by the end of 2012; we're more focused on the here and now. But, if the bulls are able to clear the high of last year of 1370 on the S&P, it should pave the way for the market to go even higher.

John S. Hopkins Jr is one of the co-founders of Invested Central. John founded the company in 2004 after spending almost thirty years in the financial services sector. John started out by producing and providing educational training programs for financial institutions and their employees. Hundreds of companies and thousands of employees have used his training materials and John has taken this successful experience and now provides educational training to stock market investors.

You can learn more about John and Invested Central, and sign up for our free stock market newsletter, at http://www.investedcentral.com/

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