Correct me if I’m wrong!
I understand that a stock is an investment into a company, so you own a small part of the company and can get a part of the profits (dividends) and sometimes make decisions for the company.
The price of a stock is determined purely by supply and demand, the displayed price is actually the price at which the latest stock was sold. So it depends entirely on how much people are willing to buy/sell the stock for.
This is where I get confused. What gives a stock its value? Isn’t it purely an instrument to buy and sell (for profit) then? What distinguishes a X stock from a Y stock for example? Why do people want to sell the stock (for less) when the company is doing badly, if the price is not determined by said company? For example if X was doing insanely bad, but people still wanted to buy the stock thus making the price rise even more, why would that be ‘wrong’?
Thanks in advance!
In: Economics
The short answer is it’s fugazi it’s made up.
The medium answer is shares each represent a percent ownership in the company. The collective population of investors decide what they believe the value is. It should have a basis in reality that considers revenue, real and intellectual property owned by the company, and other measurable factors. But it’s a gamble, and people place bets all day every day (they the market is open).
The (perceived) value of the company (aka Market Cap) divided by the number of outstanding shares = share price
It all starts/stems from the perceived value of the company.
(What are its assets vs. debts. vs revenue? Etc)
Further complicated by the bid/ask nature of the market. No one wants to pay too much, and no one wants to sell for too little.
The inherent value of a stock comes from the belief that you can collect dividends at some point in the future. You may ask, “What about stocks that do not give dividends?” They still represent *potential* dividend earnings in the future. The reason the company is not distributing profit as dividends is that they are reinvesting that money which, presumably, hopefully, is growing the company so that when they *do* choose to pay out dividends, they will have significantly more money so the dividends will be higher.
Yes, a lot of the value comes from people buying it to sell it later for a higher price, but ultimately someone needs to be the person at the end of this buy-sell-buy-sell chain – a reason to *own* the stock, not just flip it. That reason is dividends.
The other reason is that stocks usually (but not always) give you the right to vote on company operations. It’s unlikely that your average investor is ever going to own enough stock for their vote to matter. However, small investors may be looking forward to a time when someone with enough cash will buy a controlling share the way that Musk did to buy Twitter.
The stock market and investments in general are inherently complicated and even getting a decent understanding would require an explanation at least as long as a book.
As you correctly point out, a stock represents a small part of ownership of a company. Its value comes from the history of the company, the present status of the company, and how good the company is likely to do in the future. Ideally all 3 would be based on realistic and accurate data, which is why certain laws apply to companies that offer stocks. For example, they can’t say they’re close to releasing a flying car if they aren’t, for example.
So why would people want to buy or sell a particular stock? They might buy if they think the stock is cheaper than it should be (undervalued) or sell if the stock is more expensive than it should be (overvalued). That’s hard to figure out for normal people, so many people rely on investment companies to buy and sell for them, or do their own stock trading but base it on paying attention to what big investment companies are doing. This is why the value of a stock will rise or fall if inventment companies are buying or selling large amounts of it.
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