Know-How Exchange : Student Questions

Stock prices are supposed to be set based on the balance of what one person would be willing to pay and what another person who has stock and wants to sell is willing to sell at. By tracking this for the thousands or millions of transactions each day, the markets are able to display a current price.

Why do prices change? Stocks are part ownership in a company. So the price varies based on what people think of the prospects of the company in the future. If the company has a bad earnings report, people may think propsects are bad, so the price could go down.

The macro reports affect the prices, but can be hard to understand. If Greenspan raises rates becasue the economy is going well, prices may increase because of the positive news of the economy and people think that will help the company. Or more likely prices will decrease due to the impact of higher interest rates on the company. Or investors (taken as a whole) could have expected the rate change and there would be no change at all. Very hard to understand or to try to guess what will happen.

There are times when the price is not set by the long term prospects, but on short term prospects. One example is if a company fofers to buy another. This usually brings about a quick increase in prices to just below what investors think will be the price paid.

There are many elements – fundamentalists follow company performance -- PE ratio’s, dividends, profits and market technologists follow market movement – market cycles, moving averages and Elliott Wave theory. Most investors pay attention to both of these disciplines.

The market is also greatly influenced by news events like 911. Remembering back to Spring of 2003, the market was in a downtrend and awaiting the Iraq War. An old axiom regarding downtrend stocks is sell on the rumors buy on the event. The day the Iraq War began, the stock market bottomed out and eventually gained 3,000 points.

Stock market experts (not me) often advise long-term investing in good companies or mutual funds (S&P 500 Index fund) The reason is most people can never KNOW what’s going to happen in the stock market so it’s best to invest for the long term with a philosophy of “a rising tide floats all ships”.

Note: This really is just from my own experience, work with professionals when investing. Good luck

Here is a link to a tutorial:

https://www.investopedia.com/university/stocks/

Good Luck!