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 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.
Latest Answers