Understanding how the stock market works can be a useful guide to personal investing, writes Peter Watson.
Do you want to know the best place to look for reliable information on the stock market? The answer is simple. Look to the stock market.
The reason is buyers and sellers come together to trade a stock. The seller wants a high price and of course the buyer wants a low price. Both sides to the transaction must be satisfied and agree on a price, otherwise no trade would be made.
That sale price can be your best proxy to the value of a stock. This information is available for all publicly traded stocks.
That answers the first question that many investors have. What is a stock worth? The second question is what amount of return should you expect if you hold a strongly diversified portfolio of stocks?
Again, for that answer we will look to the market. Since 1926 the average annual return of the stock portfolio is 10 per cent. This information is based on the S&P 500 Index that tracks 500 US large companies.
The return for individual investors over that time period is reduced by any management fees and trading costs incurred.
In order to be realistic with your expectations as to potential future returns, a couple of things should be considered. Stock returns are not consistent. About every one in four years stock market values decreased.
Plain and simple, that’s how the stock market works. Our recommendation is to accept this reality.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Only investment-related products and services are offered through Watson Securities of ACPI. Peter Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com
