Watching the stock market on a daily basis is like watching one point in a tennis match. It may be fun and interesting, but it will not tell you much about who will win the match. A particular point may not even provide enough insights as to who will win the next point! The stock market is random and it goes up roughly half of the time and down half of the time (see graph below). On average, the market has gone up 47% of the time and down 53% of the time (since January 1st, 1994).
Technical Analysis
There are ways to help predict the direction of the stock market or an individual stock. To continue my tennis analogy, there is much more to understanding a tennis match than individual points. Instead of trying to predict individual points, try and predict who will win the game, the set and the match. We use Technical Analysis to help analyze stock prices and patterns. Technical Analysis provides a context to for daily price movements that makes them easier to understand and predict.
How Much Does the Market Move?
The stock market moves quite a bit on a daily basis even though the price changes may seem small. It generally moves up or down about one percent or less per day (see graph below). The average move is 0.03%, which is 3/100 of one percent. To put this in perspective, 0.03% of one million dollars is $300. The market doesn't always move in such small steps. There have 45 days when the market went up or down by more than 5%.
Annualized Returns
You may be thinking that these small moves are not such a big deal. Small changes become BIG changes when they occur every day. When we discuss returns from investments or savings accounts, we talk about percentages on an annual basis. Annual returns is the money you can expect to receive over the course of one year. For example, money kept in a savings account at a bank generall earns 1%. So, if you have $1000 in the bank at the beginning of the year, you can expect to have $1,010 at the end of the year ($1000 x 0.01 = $10). If you earned 1% per day, your return for the year would be over 3000%! If you earn 0.10% (1/10 of 1 percent) every day, your return for the year would be 43%! So, it is not just the days when the market soars that affect your returns.
Expected Returns
We have seen that the stock market produces a broad range of reltively small returns. This variability is called volatility and it is very important. Volatility is the uncertainty of whether your stocks will make you money or lose money. Volatility is the uncertainty around how much your stocks will rise or fall. Given that the stock market is a rollercoaster on a daily basis, what can you expect over longer periods of time. The slideshow below sums it up nicely.
Stock Market Background
Daily Moves are Random
Watching the stock market on a daily basis is like watching one point in a tennis match. It may be fun and interesting, but it will not tell you much about who will win the match. A particular point may not even provide enough insights as to who will win the next point! The stock market is random and it goes up roughly half of the time and down half of the time (see graph below). On average, the market has gone up 47% of the time and down 53% of the time (since January 1st, 1994).Technical Analysis
There are ways to help predict the direction of the stock market or an individual stock. To continue my tennis analogy, there is much more to understanding a tennis match than individual points. Instead of trying to predict individual points, try and predict who will win the game, the set and the match. We use Technical Analysis to help analyze stock prices and patterns. Technical Analysis provides a context to for daily price movements that makes them easier to understand and predict.How Much Does the Market Move?
The stock market moves quite a bit on a daily basis even though the price changes may seem small. It generally moves up or down about one percent or less per day (see graph below). The average move is 0.03%, which is 3/100 of one percent. To put this in perspective, 0.03% of one million dollars is $300. The market doesn't always move in such small steps. There have 45 days when the market went up or down by more than 5%.Annualized Returns
You may be thinking that these small moves are not such a big deal. Small changes become BIG changes when they occur every day. When we discuss returns from investments or savings accounts, we talk about percentages on an annual basis. Annual returns is the money you can expect to receive over the course of one year. For example, money kept in a savings account at a bank generall earns 1%. So, if you have $1000 in the bank at the beginning of the year, you can expect to have $1,010 at the end of the year ($1000 x 0.01 = $10). If you earned 1% per day, your return for the year would be over 3000%! If you earn 0.10% (1/10 of 1 percent) every day, your return for the year would be 43%! So, it is not just the days when the market soars that affect your returns.Expected Returns
We have seen that the stock market produces a broad range of reltively small returns. This variability is called volatility and it is very important. Volatility is the uncertainty of whether your stocks will make you money or lose money. Volatility is the uncertainty around how much your stocks will rise or fall. Given that the stock market is a rollercoaster on a daily basis, what can you expect over longer periods of time. The slideshow below sums it up nicely.