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
Every 3 months you get a dividend which is a percent of the amount of stocks you own. Usually about a half a percent every 3 months.
So if you own $100,000 worth of stock you get a check of $500 every 3 months It compounds faster if you use the dividends to purchase more shares.
In addition to that there’s capital appreciation which is the actual price of the stock itself
You buy it at one price and then your hope is that it goes up. Then you sell it. You started with the original price and now you have more money because you sold it for more.
It goes up either because the company is worth more or people think it’s worth more.
Theoretically the s&p could go up forever, and it probably will because of inflation. The s&p is also a group of top stocks that changes. It’s basically just all the biggest companies so it’s a pretty solid representation of the market. If one company completely fails, then it just drops off the list and another one takes its place. It goes down if the whole market goes down.
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.
Too much jargon in the comments section. Let me take a stab at it.
Say I want to set up a company that manufactures and sells birthday cakes (keep in mind that me and the company are different legal entities). I’m willing to put up $1000. So what the company does is that it issues “shares”. Let’s say the company tells me that it’s issuing 100 shares to me, each worth $10. This is where it all begins. I’m running my little company, baking cakes at $1, selling them for $2, and making a nice little profit.
At this stage, I own 100% of the company. It’s entirely privately owned by me. Let’s say I need $1000 more to buy an additional oven and a store. I could either borrow the money or I could decide to sell the shares of the company. Let’s say I decide to sell the shares. I’ve done a lot of financial mumbo jumbo (valuation techniques) and I’ve arrived at a conclusion that each share of the company is now worth $50. I decide to sell 20 shares to a stranger and now I’m left with 80 shares (This is called and offer for sale). There is another way wherein the company could decide to issue 20 more shares and I’d still be left with 100 but the total shares would be 120 (this is called a fresh issue).
The catch here is that valuation techniques are subjective. For example, I decided that my company shares were worth $50 each. Another person could say they’re worth $30, and another could say they’re worth $70 (coz he thinks my company has potential).
With the basics out of the way, What happens in the stock market is that companies have gone through the process of issuing a lot of shares and there are people with shares, some who are looking to sell, some who are looking to buy. Let’s say a share is trading at $1000 in the market right now. Valuation is subjective, there is someone who says he’s willing to pay $1100 if anyone is willing to sell. No one sells. Another buyer who could potentially value the company at $1500 per share says he’s willing to buy at $1200. No one’s willing to sell. This process is basically how the price of a share rises in the market. You have buyers who are willing to pay more than what the share’s current price is.
It works exactly the opposite way when it comes to selling. And this subjectivity and willingness to buy / sell is what drives prices up or down.
>If, say the S&P500, keeps growing there is no ‘peak’ to sell at.
First, there are lots of peaks — it doesn’t go up every day, so it doesn’t make new peaks every day. In fact, you know that because it still makes the news when it sets a new peak. When you hear that news, most stocks are the most expensive they ever were.
When the stock market crashes, think of it as a “big sale at the stock store”.
>Or do you just hold it forever and sell when you want to get the money?
How do you know when to pull money out of your bank account? It gets interest too. It’s the same thing. Only your bank account doesn’t occasionally cut itself in half, but stocks do that all the time.
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