As I understand it, when people buy a share of stock, the price goes up. When people sell it, the price goes down. So what does this have to do with the company itself that this stock represents? For example, if a bunch of people wanted to make Apple’s stock price go down, they could just agree to sell their shares. So what does the actual stock price have to do with the company?
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Stock is ownership in the company itself. It’s not as simple as buying stock makes it go up and selling makes it go down. In order to sell the stock, somebody has to buy it. So the same amount of stock still exists.
It has to do with supply and demand. The more successful the company is, the more people are willing to pay for a share (a portion of ownership in the company) of stock. So the price goes up because it is desirable.
Likewise, if something bad happens in the company, people don’t want to be part of it and will part with their stock for less than what it is worth so they can be free of it. This brings the price down.
> As I understand it, when people buy a share of stock, the price goes up.
There’s the piece you’re missing. Buying a stock doesn’t do jack or crap to the price of the stock.
As far as price is concerned? All buying a stock does is mean that there’s less of it for other people to buy.
Imagine this example, to help you think your way to answering your own question:
Imagine that after a really really really long day at work you want nothing more than your most very favorite candy bar to treat yourself a little bit.
Normally that’s no problem. You go into the store, buy what you want, and enjoy your little slice of heaven while you eat your candy bar.
But what if, for example, someone else figured out that a lot of other people like you want that candy bar at the end of their workday, and decided to buy all of them.
The store can’t sell them, since they’re officially sold out.
But the dude right outside the entrance to the store? He’s got a dozen of the best candy bars ever, and he’s willing to sell them to you for $20 each, cashy-money only please and thank you.
So you fork out your $20. Because dammit. You really want that candy bar.
But next week you’re coming in prepared. You buy all of the store’s candy bars on Monday morning at the normal price, knowing that that the weirdo out front will buy them off you at 150% of the original price. And the weirdo is only buying them at 150% because he knows for sure he can resell them at 200%. So, guaranteed 50% profit off of a few minutes work on Monday morning as far as you’re concerned.
That’s basically the entire idea behind the stock market.
There’s a lot that goes into it overall, but as the other commenter said, stock is literally ownership of a tiny part of the company. When a company goes public, it breaks itself up into many shares and sells them for the public to buy. If you look up a stock online, you will see something called the [market cap](https://www.investopedia.com/terms/m/marketcapitalization.asp) which is the total dollar value of all of those shares. So if the price of the shares drops, the market cap will drop as well (and vice versa). Then, since a company’s market cap is one way people value a company, a change in that value implies a change in the company’s value.
Speaking on stock transactions, there are a few types out there, but it’s important to know that you can either transact at the market price or at a price you specify (one way to do this is a [limit order](https://www.investopedia.com/terms/l/limitorder.asp)).
If the stock of Company A just sold for $99, I might be interested in selling the share I have, but I want to specify that I’ll only sell if someone gives me $100. On the other hand, my friend is interested in buying a share, but he wants a good deal and will only buy if someone is willing to sell it to him for $98. The difference between these two prices is the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp). In this case, we are at a stalemate until a [market order](https://www.investopedia.com/terms/m/marketorder.asp) comes into play. This type of order is someone who enters the market and says they want to buy or sell at whatever price will get the deal done, meaning if someone wants to buy a share they will do so for the $100 I’m asking for, and if they want to sell a share they will do so at the $98 my friend wanted. This is how the prices of a stock go up and down.
It’s very important to note though that I’ve used round numbers in this example. Usually the difference between the bid price and the ask price are much smaller and we don’t usually transact one share at a time. In addition, there are other people in the market, so some people who own a share may only want to sell at $101 or will only buy at $97, in which case I or my friend would transact first, and then these other orders would be next in line.
There is a lot more to the market, but hopefully my explanation made sense. Happy to answer any other questions as I can.
Only a few things.
One, at the investor meetings, investors can vote to do a dividend. That means some money comes out of the company bank account, straight to the investors. It gets divided up based on by how many shares they have. I think they’re allowed to divide things that aren’t money, but it sounds like a headache and they don’t actually do it.
Two, they choose the board of directors (by voting). The board of directors chooses the CEO (by voting). The CEO decides everything that happens in the company (by saying it and firing people if they won’t do it). So that’s a big deal.
Three, if the company goes out of business, they get everything that’s left, if anything is left. So that sets a kind of minimum price called the book value. If the shares were below the book value, you could theoretically buy them all, vote to close down the company, take all the money and still have a profit. So they don’t go below that.
There’s no easy calculation for how much a share should be worth. There are many ways to estimate it, but no way to know for sure. If *your guess* is that it’s lower than what the market says, you should sell your shares, and if your guess is higher, you should buy some. If a bunch of people would sell their shares to make the price go down, but you think the price was okay before, and you still think it’s okay (like, you don’t get scared there must be some reason to sell that you don’t know about) then you can buy the shares they’re selling and you got a bargain.
Messing with the price just to mess with the price is illegal. If you’re selling the shares because you think the price is too high and you’d rather have the money than the shares, that’s okay and normal, happens millions of times every day. If you’re selling the shares because you wouldn’t rather have the money than the shares, but you actually want to trick the market by forcing the price to change, eg. so you can buy more shares at the lower price, that’s illegal. That’s a type of fraud called market manipulation.
The stock price is a representation of what investors believe the company is worth.
People buying and selling stock will influence the price. This is the basis of supply and demand. I think the part you’re missing is that for a single stock there could be millions of trades (a buy and sell pair) per day. With so many investors buying and selling the stock, a price range develops around where investors believe the fair price to be.
Typically, stocks will not move from the established price range unless there’s some new information that causes many investors to change their valuation of the company. For example, if apple announces they sold more iphones than expected, then their stock price will rise. Other news is more ambiguous like if apple spends billions investing in VR. Some investors will consider it a positive and purchase stock, while others may see it as a negative and sell their positions. A new range will be established based on the majority of investor sentiment.
What links a stock to the actual company is that stock holders are the owners of the company and make decisions on how the company is ran. The price is just the demand that people have to own part of that company.
In theory, if someone bought all stocks, they would own the company. The company has some inherent value (due to the money it makes and assets it owns). The value of stocks should very roughly correspond to the value of company, except, of course, people like to speculate. If people think the company has potential to grow in the future, they may not be willing to sell their stocks at the value it has *now*, because they’d rather wait until it is bigger and more expensive. On the contrary, if people feel like a company is going to do badly, they may be willing to sell their stocks below what they “should” be, so as to find a buyer more easily and get them off their hands before the value drops even lower.
When people get caught in their speculations too much, the value of stocks can get completely out of touch with reality, and that’s how you get bubbles and crashes.
I’m surprised no one has mentioned dividends yet, so I’m gonna talk about dividends.
Just voting in the board of directors of a company doesn’t make a stock worth something, for a stock to be worth something there have to be mechanisms that you can profit off this ownership. Dividends were the original such means, whenever the company makes a profit, they would take these profits and distribute them to shareholders on a per share basis, so each share is entitled to a certain chunk of the profit of the company every year and this is what makes the share valuable and worth money.
It doesn’t have to just be profit, it could also be corporate assets, back in the 80s for example there was the idea of a corporate raider, sometimes stock price was at a mismatch of the actual assets of the company, the company would own buildings and stuff that was more than the stock price/market cap, so corporate raiders would buy up the stock, enough to control the company, use their voting power to force the company to liquidate, sell all its assets, and the sale of those assets would net the raiders a profit. By this means corporate assets are a proxy for corporate value as well and matter.
Nowadays companies don’t issue dividends usually, for various tax incentives it’s become a better idea to take that dividend money and reinvest it in the company to grow the company. This pumps the stock price up, because **the stock price is based on what the market thinks the future dividend earning potential of that stock is**, or at least it’s that way in theory in a sane market (*cough* tsla *cough*).
Or they can cheat with stock buybacks where a company buys some of its shares back so less shares are out there next year meaning each share is entitled to a bigger chunk of the profit.
But at the end of the day the point is it comes back to dividends. Even if a company doesn’t issue any.
Some points linking stock price to the company:
* Stock is the company ownership. The job of a (publicly listed) company is to maximise its shareholder’s wealth – which is arguably the general objective of any profit-making company.
* The company CEO’s job therefore is to satisfy the shareholders. The CEO also tends to get paid in shares. Since the CEO runs the company, affect on long-term market value of the company tends to influence the strategic direction the company goes in. – If the shareholders aren’t satisfied, they can vote to replace the CEO with somebody else.
* A company sells shares ie. portions of its company, in exchange for funding which goes into its operations. It’s in the company’s interest therefore that they can get as much money per share as they can.
>if a bunch of people wanted to make Apple’s stock price go down, they could just agree to sell their shares
This feels like a tangent away from your original question. But this sounds like market price manipulation, which is generally illegal.
If a large shareholder was doing this, and it was obvious they were doing this in order to acquire more shares, this would make the company look unstable – and so would deter other investors. If the market is deterred from the company then the price won’t go back up.
So companies can actually raise capital by selling shares. The whole actual purpose is to raise capital quickly or in a pinch. Perhaps more than any individual investor or bank is willing to personally risk.
So how do you convince thousands of random people to give you money? By promising them that their share of the company will be worth more in the future, and they could sell it to another investor in the future to recoup their investment *and then some*.
Now remember that if you own a company and sell shares, *you* own it all before dividing it up and selling it. Typically, you always want to own the most shares (because if you own 51% of a company and a thousand people divided up the rest, clearly you are still the “owner” right?)
This here I think is the piece you are missing. If you started a company most of your “net worth” comes from owning all those shares – you definitely have an interest in that share price being as high as it can. The only way to do that is to run your business well. In fact to raise the price you must have growing profits, attracting new investors willing to buy in.
In summary: the only way to get filthy rich is to own an asset that you can divide into pieces and convince people is valuable. That is to say, create a successful business. If it fails it takes your wealth down with it. That’s how “shares” are tied to the company.
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