It begins when a company
wants to raise money - perhaps to develop a new product, build a new manufacturing
facility, or increase the production of its product. To do this the company either borrows
the money by issuing bonds - in which they promise to pay back the money with interest, or
they sell stock in the company. The company is selling little pieces of the company - the
buyer of the stock then gets to share in the profits of the company (when there are
profits. This is also why stocks are sometimes called "equity" - the owners of
the stock have equity in the company, or partial ownership in the company,
When the stock is initially offered for
sale it has no value - It is only worth what someone is willing to pay for it. The initial
public offering (IPO) is now offered at a predetermined number or shares and at a
predetermined price. Now that the stock is publicly offered for sale via a stock exchange
such as the NASDAQ, or NYSE as people buy and sell (trade) the stock the value is set by
how much people are willing to pay for it.
Lets say the stock was
offered at $20.00 a share - sometimes that value will skyrocket, and other times it will
drop below the $20.00 very quickly. The value is set by perhaps thousands of people
trading it in the free market - that's the whole beauty of the stock market. Its a market
of buyers and sellers each deciding how much they are willing to pay to buy or sell their
"pieces" of a company, Its just like going to any other type of auction to buy
or sell something you want to have or get rid of - in this case its "pieces", or
shares of a company.
 Who Are
These Buyers and Sellers?
Generally investors can be categorized as
either :
Technical Investors
Fundamental Investors
The technicians buy and sell
stocks by identifying stock price movements, and past price trends. They use tools such as
charts, graphs, to predict the time to buy and sell a stock. They carefully follow the ups
and downs of the stock market - often minute to minute. They are interested in the trends
of the market, as opposed to specific fundamentals surrounding a company.
The fundamental investors
generally ignore the ups and downs of the market. They are looking closely at individual
companies for good "values", i.e companies they think are low-priced as compared
to its value. They use tools such as earnings, dividends, p/e ratios, sales, etc. They
believe that if they identify growing, well-managed companies the stock price will rise
and reflect the value and performance of the company. Fundamental investors generally
invest for the long term, as they believe the company earnings will grow over time. They
are also referred to as Value Investors.
Why
Stocks Go Up and Down
If a company's
earnings (profits) per share keep growing the price of the stock will go up. This is what
drives the success of the company over the long term. Outlined below are factors that may
effect the stock's price for the short term:
Latest earnings
report. Strong/growing profit margins may push a stock up, while rising debt or inventory
may depress it.
New
products/services. Positive reports from the media or influential stock analysts may cause
the stock price to rise. Weak sales of the product can cause the price to go down.
Earnings report
pre-announcements - if the company expects to underperform Wall Street's quarterly
earnings estimates, expect the stock price to fall. The opposite can also cause the price
to go up.
News of the
company's business operations can cause the price to go up or down. Included would be
expanding globally, new contracts, or business alliances with other companies.
Things such as
rumors, gurus in financial publications, speculation that a company may be bought out, or
insider buying and selling may effect the price.
- Remember long-term values are driven
by the growth of the business. Day to day dips and bounces are not important. What is
important is how the company is actually performing.
With an overall view of how
the stock market works and the two broad type of investors you can now focus on the type
of investing style you would like to develop yourself. Read, do your homework and soon it
will make more sense!
     
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