You can check the value of stocks share online, in apps on your phone etc… But what is that value really? And how do we know on real time how the value has changed.
For example, if a company increases profits its value in the stocks will increase, but what is recording the incomes of the company? Is it connected to a similar system that the bank uses to store money? Is it similar to an internet network?
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> You can check the value of stocks share online, in apps on your phone etc.
These apps report *share price*.
Imagine trading Pokemon cards is popular at your school. There’s a bulletin board in the cafeteria where people pin up sheets of paper with trade offers — “Buying 3x Bulbasaur, $0.75 – Lenny”. “Selling 1x Pikachu, $2.15 – Mary”, and so on.
You might notice a couple curious things about the bulletin board:
– You *never* see two “overlapping” offers. Like “Selling 5x Butterfree for $2.05 – Alice”, “Buying 3x Butterfree for $2.10 – Bob”. This is because there was no need for Bob to post his offer, he could have just taken three of Alice’s offered Butterfrees for $2.05.
After a while, one of the kids is experimenting with programming and makes a computerized version of the bulletin board. The computerized version matches people like Alice and Bob with overlapping prices. It also lets users place “don’t care” buy and sell orders, for example:
– When someone just got their allowance and wants to buy a particular card immediately and don’t care too much about the price (market “buy” order), they scan the board for the lowest offer and take that one.
– When someone doesn’t have lunch money and wants to sell a particular card immediately so they can eat and don’t care too much about the price (market “sell” order), they scan the board for the highest offer and take that one.
For each card, whenever a successful “match” of buyer and seller occurs, the computerized system posts online to report the price. People who care about your school’s Pokemon trading card scene can check those posts through websites or apps. That’s what you see on apps, websites, financial news shows, etc.
> if a company increases profits its value in the stocks will increase, but what is recording the incomes of the company?
In the US, a company whose shares are traded on the stock market is legally required to report its financial information to the government in an annual report (Form 10-K) and quarterly reports (Form 10-Q). Anyone can download these reports from a government website ( [EDGAR](https://en.wikipedia.org/wiki/EDGAR) ). You can usually also get these reports through your stock trading website, and from the “investor relations” section of the company’s website. The annual reports are checked (audited) which means that (hopefully) the reports will be pretty accurate, and nobody will lie about the company’s financial conditions. (In 2002 the US made [major reforms](https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act) to its financial reporting laws in response to the sudden collapse of two big companies (Enron and Worldcom). It turned out those companies filed financial reports full of lies that showed they were healthy and growing, and the big accounting company that was supposed to check the reports (Arthur Andersen) found some of the lies but didn’t raise the alarm. That accounting company also itself later collapsed because after that, no one trusted them to do their job and check things properly.)
A lot of stock traders read these reports and accordingly adjust their prices and buying / selling strategy.
> Is it connected to a similar system that the bank uses to store money?
A company can open bank accounts and own financial assets like stocks and bonds. These will all be in a company’s annual and quarterly reports. In the computer era, some companies certainly have daily or real-time reports of their assets and balances (especially in the financial industry) but these are usually only for the company’s internal use.
One thing that I should mention is that unlike Pokemon cards, many companies pay a portion of their profits as *dividends* to shareholders. How much are you willing to pay right now to get $100 a year, forever? $300? $500? $1000? $5000? Or flip the question; if you’re currently getting $100 a year, forever, how much would someone have to pay you right now to give that up? $300? $500? $1000? $5000? Everyone has their own personal answer to these questions, and posts offers accordingly to the stock market (which works basically like the computerized bulletin board). Then overlapping offers are matched until no more trading occurs.
Except the “forever” part isn’t guaranteed, a company’s dividends may go up (or down) as its profit increases (or decreases). For “mature” companies, the dividend is what links the price to company performance. So figuring out “What offers / trades should I make?” depends not just on “Do I prefer money now or an income stream over a long time?” but also on “How much, how fast, and how likely do I think it is that the company will grow / shrink?” Every trader has their own answer to these questions, and the stock market is a means for them to come to a consensus.
For “immature” companies that don’t pay dividends, usually the price is based on a guess about how much dividends the company will be able to afford to pay when it becomes “mature”, and/or what a larger company might be willing to pay to buy the company.
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