Frequently Asked Questions
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.