Let’s just say for example, I bought a stock at $10. Then it goes up to $500
I can obviously make a profit, but why would someone buy it at such a high price?
Is it like the person who buys it at $500 is hoping that it will go up to $1000, then the person who buys it at $1000 hopes it will go up to $1500, and so on?
In: Economics
You’re really asking ‘what is a company really worth?’ This can be answered for simple companies using various methods, one of which is Discounted Cash Flow analysis. Companies are worth more if they generate more profit. Depending on the company, it may be entirely logical and justified to be at $10 and $1000 10 years later. While different people with different levels of optimism and knowledge might up with a different calculation using any valuation method, you can put a lower and upper bound on a reasonable price.
For stocks, they can keep going up in value because the economy grows., and this can go on more or less indefinitely.
With crypto technically the same thing could happen as long as people kept putting money into the market, but ultimately people realize it’s a pyramid scheme based on nothing with actual value, and cash out.
Who buys high and sells low?
Me, butthole.
Don’t have to rub it in
Let’s separate stocks (and not meme stocks) from crypto. Crypto is quite literally greater fool theory incarnate. Meme stocks are just about that.
Stock in actual companies is nothing like crypto and little like meme stocks. You own a fractional share of company. That company sells somethng (goods, services, something) that produces revenue. It it produces more revenue than it has in expenses that is called profit and every share entitles you to fractional entitlement to that profit. The more profit it makes, the more the share is worth. Also, companies have prospects. Maybe they don’t have a product yet, but something very promising is in development (imagine a pharma company in’s phase 3 trials of a very promising treatment). They’re not selling anything yet, but they might just have the next blockbuster – that will boost the value of the stock a lot. Companies also have assets, inventory, factories, raw materials, real estate, etc. all that has value. As a stock holder you own a fractional share of it. If that value goes up, so does your stock value.
Crypto and to a certain extent meme stocks are pure gambling. There’s no actual value. The only reason you might make money is some other fool is willing to pay more that you did. But that’s not based on anything other than that fool thinking some other fool will want to pay more for that than they did. It’s gambling, not investing.
>Is it like the person who buys it at $500 is hoping that it will go up to $1000, then the person who buys it at $1000 hopes it will go up to $1500, and so on?
Yes
For a fellow trader, they are just flipping for a profit, sometimes it works, sometimes it doesn’t.
For an investor, they have their own reason to buy at a certain price and a certain time. Maybe for dividends, diversification, or just seeing the potential gain, or even something else.
It is basically a secondary market. A flipper will always looking for something undervalued. A user will have different reason to buy.
Since it is very liquid, there is a potential of huge price movement (this is what flipper/trader looking for).
This is what I know so far about this world.
Sometimes that happens. Stocks represent the value of a company. You expect the value of a company to change over time as they sell new products and open locations or as they cut products and close stores. This means it’s a valid strategy with stocks to buy a stock and hold onto it for a long time, because the stock’s price may continue rising in value for a long time. Some stocks will also provide dividends where money is paid out to stockholders without them selling the stock back.
Most crypto currencies run into the problem you describe. If the crypto doesn’t end up getting used as a currency, then the rise in value is based on how much people are buying it at its higher prices. In the case where a crypto currency is only being used as speculation, new people keep driving up the price until the price gets high enough that people start selling on mass out of fear of the price dropping. This tanks the value of the crypto currency, making the only winners those who sold before the crash
The average r/wallstreet bets user. These guys have a talent to mistiming the market and buying high while selling low
> Is it like the person who buys it at $500 is hoping that it will go up to $1000, then the person who buys it at $1000 hopes it will go up to $1500, and so on?
That’s exactly it. That’s how bubbles start, and it gets pretty ugly when they pop.
Doesn’t have to be stocks either; Holland had a [tulip craze](https://en.wikipedia.org/wiki/Tulip_mania) once where the prices of tulips became astronomical.
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