What makes stocks go up and down?
The stock market is essentially a giant auction - only instead of antiques and heirlooms, it's ownership in businesses that's up for grabs. Stocks are traded at places called exchanges. At these exchanges, traders buy and sell shares of companies. Generally, the price of a stock is determined by supply and demand. For example, if there are more people wanting to buy a stock than to sell it, the price will be driven up because those shares are rarer and people will pay a higher price for them. On the other hand, if there are a lot of shares for sale and no one is interested in buying them, the price will quickly fall.

Because of this, the market can appear to fluctuate widely. Even if there is nothing wrong with a company, a large shareholder who is trying to sell millions of shares at a time can drive the price of the stock down, simply because there are not enough people interested in buying the stock he is trying to sell. Because there is no real demand for the company he is selling, he is forced to accept a lower price.

What is a stock split?
A stock split is essentially when a company increases the number of shares. For example, if you owned 25 shares of XYZ at $15 per share, and there was a 2-1 stock split, you would then own 50 shares worth $7.50 each. Why do companies issue splits if you still have the same amount of money?

Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This creates a condition where more of the company's stock is bought and sold [this is called "increased liquidity"]. The problem, in theory, is that the increased activity will also leads to bigger gains and drops in the stock, making it more volatile.

Some investors believe splits are a good thing. [Their thinking goes "Well, if the stock was at $15, and now it's at $7.50, it has to go back up to where it was!] This is wrong. The stock is where it was... remember that each share now represents half of the equity in the company that it did before the split. That means that each share is entitled to half the dividend, half the earnings, and half of the assets that it once was.

Some companies have been famous for their no-split policies. The Washington Post has traded well into the $600 per share range, and Berkshire Hathaway [which was at $8 a share in the 1960's] has traded around $71,000. This has created the welcome condition of a stable shareholder base.


What are commodities?
High-Risk, High-Dollar investments, commodities are not for everyone. You can lose your shirt - or become an instant millionaire. What does orange juice, wheat, cattle, gold and oil have in common? They're all commodities.

Commodities are objects that come out of the earth. People buy and sell them based on speculation. For instance, if you thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible. If you were correct, the price of coffee would be driven up drastically because the crop had been destroyed by weather, making the surviving harvest worth more.

The general rule of thumb when investing in commodities is... "the rarer it is, the more it's worth".


What is a blue chip?
Everyone loves blue chips. A Blue Chip is the nickname for a stock that is thought to be safe, in great financial shape, and firmly entrenched as a leader in its field. They general pay dividends and are favorably looked at by investors. A few examples of blue chips would be Wal-Mart, Coca-Cola, Gillette, Berkshire Hathaway, Exxon-Mobile, etc…

What is risk and how does it affect my return?

Risk is generally defined by academics and mutual fund analysts as return volatility, or the degree of "ups" and "downs" of returns. But there's more to risk than volatility. Risk and long-term reward are generally related.

An investor's return consists of current income, plus capital gains due to growth, minus any losses from the investment. Sounds simple, and it is, except that most investors would prefer to know the return before making the investment. Absent a crystal ball, you can only make an educated guess as to what kind of return to expect. If your actual return turns out to be different than the return you expected, you could suffer an unexpected loss.

Of course, your expected return must be reasonable—expecting a return of 25% just because your stockbroker says that's what you'll earn is not reasonable. But even if your expectations are reasonable, there's always the possibility that your investment's actual return will be different than expected. This is the risk you must take on as an investor, and it includes the possibility of losing some or all of your original investment. Risk is greater when the possibility is greater that the actual return will differ from the expected return.

Put another way, the greater the uncertainty, the greater the risk.

How and what should I diversify?

Diversification should occur at all levels of investing. Diversification among the major asset categories—stocks, fixed-income and money market investments—can help reduce market risk, inflation risk and liquidity risk, since these categories are affected by different market and economic factors.

Diversification within the major asset categories—for instance, among the various kinds of stocks (international or domestic, for instance) or fixed-income products—can help further reduce market and inflation risk.

Diversification within an asset class—among individual securities—helps reduce business risk