Special Topic 3. The Stock Market: Its Function, Performance, and Potential as an Investment Opportunity.


Since the individual is investing her hard earned income and wants to use it for her retirement she should be very careful while investing in the stock market. She should purchase stocks from the stock exchange and can hire an experienced broker or a firm involved in buying and selling of stocks, who will charge a fee for their services. Trading in listed stocks is a safe deal. It is important to read about the firm and find about the assets, financial stability, turnover and general status of the firm in the market before investing in its stocks. A big firm which is well established sell its shares at a high price unless it is a new issue. The increase in value of shares depends on the turnover or the growth rate of the business. It is always better to own a diversified portfolio of stocks which are not related to each other, because adverse circumstances affect all the firms in the industry. The stock holder should not be in a hurry to sell the stocks for a small gain if there is a marginal rise in the stock prices, one should be patient and understand the market before taking the call. One should be up to date with the latest happenings in the business world so that one can foresee the sequence of events to happen in the future and accordingly plan the move to buy or sell the stocks. It is important to keep track of government policy decisions too. Investing in the stock market is a risky venture however, it does promise a good return if the investor is vigilant and well informed about the market.

For any firm the rate of interest at which it borrows money from a bank is very critical because it directly affects its profitability and then its stock prices. The rate of inflation has to be also taken into account as it determines the actual rate of return of the firm. A higher rate of return on deposits will make keeping funds in the bank very attractive. In order to give this high rate of interest to its deposit holders it will charge a still higher rate of interest from its borrowers, which are generally firms and other businesses. This affects the profitability of the firms and their stock prices will fall. If the interest rates are low it will lead to low deposits in the banks. People will save less leading to low investment. The government will have to implement an expansionary monetary policy which will lead to inflation. As a result profitability of the firms will decline and the stock prices will fall. Therefore, if there is inflation and the interest rates are high, it will result in a decline in the stock prices.

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