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The stock market features a collection of publicly traded companies. Investors can buy part ownership in these companies through the purchase of shares. Over time, the stock market can make money for investors through capital appreciation, or the growth in value of each individual share. Investors who have held a range of stocks for a long period of time have typically earned profits.
The first thing to observe about the long-term performance of stocks is that the general trend of the market as a whole is upward. Despite some periods of extreme turbulence and erratic spikes and valleys, historically, the stock market grows consistently and reliably. For example, the U.S. stock market, when adjusted for inflation, has grown by almost a factor of 10 between 1871 and 2010. Not every stock has achieved this kind of performance individually, but as a whole, the market continues to expand over the long term as population, the economy, the pool of investors and the amount of money in the market grows.
Owning stocks means owning a fraction of a business. Businesses, of course, are subject to all sorts of changes and turns of fortune. Many factors can affect the fate of a business. Management can change. Debt or rapid expansion can kill a once sound business. Unfortunately, even a business that has a long history of success is subject to the vagaries of the market, such as the huge tumble Eastman Kodak stock took in 2012 in response to consumer shifts to digital photography. On the other hand, there are certain blue chip stocks, such as Kellogg Co. and General Mills, that have proven their fundamental worth through consistent earnings, sometimes spanning more than a century.
Supply and Demand
The stock market, like the rest of the economy, is subject to the forces of supply and demand. These of course are not the only factors affecting the growth of stocks, but they are very important. In general, when a stock is in high demand relative to the available shares in the market, the value of the stock is driven up. By the same token, if there is a large supply of stock available but no one wants to buy it, the value of the stock is driven down. These factors are relevant because long-term demographic and population changes could have drastic effects on the stock market. For example, as baby boomers continue to build retirement funds, this emerging class of investors all over the world could bolster demand in a wide range of stocks, driving up prices.
The fundamental value of a stock becomes very important over the long term because extended periods of time give market forces a chance to bring stock prices to proper valuation. In the very short term, many investors can get rich off of investments that are essentially worthless just by being savvy. These methods are much less likely to work in the long term. The companies that actually have something to offer, and which are run soundly, are the ones that are likely to grow steadily in value over time.
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