I understand buy low and sell high, but then what?
If, say the S&P500, keeps growing there is no ‘peak’ to sell at. Do the gains compound? if so how? Or do you just hold it forever and sell when you want to get the money?
In: Economics
when you own part of a company, you will get a portion of the profits whenever those are disbursed to the owners. These funds are “dividends”, and are what the value of the stock is (supposedly) traded on. Successful companies pay out dividends to the owners, you get a portion of that money.
so say you own 10% of a company, and that company profits $1,000/year every year like clockwork: You will be making $100/year indefinitely. How much would you pay to get $100/year for doing nothing? That’s the cost of buying/selling the stock. It also comes with risk (what if that profit margin drops), but also benefits (what it goes up?) those are also “calculated” by the people that trade stocks all the time, and these changes are why the value fluctuates.
Since the value fluctuates, it is also possible to buy and sell stock for the purpose of capturing the value fluctuation, instead of the value of the dividends. This is called day trading, or short term investment, depending on whether you’re holding for hours/days or weeks/months.
The most recent (in)famous example of this is the gamestop stock – people were valuing the stock with the assumption that gamestop was a failing company due to the drop-off in physical game sales, but some looked at gamestop’s earning reports and their future plans and realized that the drop-off wasn’t as bad as had been assumed. Since the stock was undervalued it became a good buy, and then quickly became overvalued as people rushed to buy the “cheap” stocks.
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