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Posted By Humphrey Bwayo Posted On

The U.S. Stock Market Explained

Not everyone dreams of investing in the U.S. stock market or equities market. For many people, this is a platform that has ridden individuals off their life savings, with some having to go back to work, starting afresh at retirement age. The reality is, investing in the stock market comes with its fair share of risks, but if approached with discipline, it has the capability of turning your life around.

So, what is a stock market?

Well, if you are looking to get some home supplies, you go to the convenience store, but when you want to buy stocks or mutual funds, you’ll need to buy them online through the stock market. The only thing you’ll need is a robo-advisor, a brokerage account, or an employee retirement plan.

A stock market is a place where shares of publicly owned companies can be bought or sold. Also, publicly traded shares can be traded through centralized exchanges or over the counter (OTC). Ideally, the stock market is a free economy market where companies get the chance to access capital by offering part of their ownership to investors.

The companies on the stock market get a chance to access capital that helps them fund their growth. For investors, it is an opportunity to be part of an existing established business reaping the rewards without the risk of investing in a company that is either new or unproven.

Has the stock market ever been shut down?

Yes. In fact, in March 2020, when S&P 500 index dropped by 7% shortly after opening, the circuit breakers triggered a 15-minute break of the U.S stock market. When trading resumed, Nasdaq, Dow Jones Industrial Average, and S&P all dropped more than 7% at the end of the day, which is perhaps the most significant one-day percentage decline since 2008. Coronavirus instigated the fall.

The Stock market has been shut down a couple of times in the past, including 2015 due to a technical hitch, 2008 as a result of an economic recession caused by the housing crisis, 9/11, the October 17, 1997 circuit breakers, and the 1987 “Black Monday” caused by a 22% fallout in the market.

What is a stock market breakdown?

A stock market breakdown is a period where there is a downward move in a security’s price. This usually occurs through an identified level of support that leads to further declines. Ideally, a stock market breakdown can be identified by traders by using specific technical tools like trendlines, moving averages, or chart patterns. With the use of trendlines, a trader can draw on the chart to connect several swing lows to mark areas where the prices are susceptible to breaking down.

When there is a hefty volume, it is usually accompanied by a breakdown below the critical support levels that reveals participation in the move downwards.  At this point, a trader can choose to close out the existing long positions or short sell a security when it breaks down below the support level. This is often an indication that the bears are in control, and there is an additional selling pressure likely to follow.

Is the U.S stock market going down?

That depends. It is hard to pinpoint the specific factors that would lead the stock market to go down as a whole. For starters, the stock market is an interrelated, complex system of small and large investors making uncoordinated decisions on various investments. However, there are fundamental economic principles that can help explain the up and down market movements.

The U.S. stock prices change daily behind market forces. Meaning the share prices will change due to supply and demand. In case more people want to buy a specific stock (meaning there is demand) then sell it (supply), it forces the price to move up. Equally, if more people want to sell a specific stock than those willing to buy it, there would be a greater supply for the stock than demand, forcing the price to fall.

Will the U.S stock market collapse?

It’s hard to make a definitive assertion. However, trends experienced in 2020 could help make a prediction. The pandemic shook the stock market forcing investors to experience a decade’s worth of volatility in a few months.  While stocks such as the S&P 500 were lower than 34% at the pandemic height, it finished the year higher by double digits.

2021 doesn’t necessarily mean the end of unprecedented volatility. Many things could shake up the stock market, including the efficacy of the Coronavirus vaccines, the global reach of the vaccine, virus variants leading to a new round of shutdowns, failure to pass the additional stimulus, and loan credit delinquencies overwhelming financial institutions.

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