eli5: How do stock traders know when to buy and sell, is it pure guessing or is there factors that affect it?
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Your friend Carol has a lemonade stand. It’s doing pretty well.
You make a deal with Carol. You’ll give her $100, in exchange for a share in the profits. When her profits go up, she’ll give you a share of that.
If you wanted to, you could sell your share to Tim. Tim gives you $100, but now Tim gets a share of the profits, not you.
But you’re not sure if you should sell to Tim yet.
A week goes by, and Carol’s doing great with her lemonade stand. She sells out of product every afternoon. She raised prices, and still sells out every afternoon.
Should you sell to Tim? Or keep your stake, and keep collecting your share of the high profits?
What if Tim offers you $200 instead of just $100?
A month later, it gets colder outside, and nobody’s buying lemonade anymore. Carol’s sales are down, bigtime.
Should you sell to Tim? Or should you keep your stake, hoping sales will go back up. I mean, when sales are down, you’re not getting any share of profits, so your share is worthless to you, right?
Now Tim is only offering you $50, because your stake isn’t worth as much.
Should you sell?
The answer is really up to you, and how risky you like to be.
The answer also depends on how knowledgeable you are. Maybe you know a LOT about the lemonade business, and you know these poor sales will recover. Maybe you know something about Carol, and that she doesn’t follow through on things, or is a poor manager of money. Maybe you know that they’re building a new neighborhood and traffic will increase past the lemonade stand.
It all depends on you.
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