This is part two of the series How to Invest in Stocks.
These days, almost everybody’s worried about the stock market. Understanding why stock prices change is is one of the most important financial lessons you can learn. Because of that, this article will explain why stock prices change and how you can profit from the changes.
Supply and Demand
At the most fundamental level, supply and demand dictate stock prices. Remember, as we talked about in How the Stock Market Works, a stock is ownership in a company. Stocks are bought and sold among people who are interested in being part-owners of a company. This means that stock prices go up the more people want to be part-owners of the business; consequently, stock prices go down when fewer individuals want to be part owners.
So what causes individuals to want to buy/sell stocks in a business? There are literally dozens of reasons that you can learn about else-where, but here we will simply analyze a few of the “big” causes.
Why People Buy and Sell Stocks
Though there are many reasons people buy and sell stocks, here are some of the biggest reasons.
- Profit. Profit is the blood of business. Though thousands of “academics” and other “elites” often declare that profit is somehow evil, they forget that it’s the foundation for Western society. Without profit, there is no business, and without business, there is no civilization. Philosophy aside, if a business is doing well in terms of profit, it’s worth owning. This is why stock prices often go way up after the public finds out a company has had great profits for a quarter.
- Dividends. A “dividend” is money that is sent directly to stock-owners. This is a biggie, and is one of the biggest reasons I will buy a stock. If a stock doesn’t pay dividends (like Google doesn’t), then the stock is worth much less. Big dividends = big price.
- “Sheepness.” This is pretty sad. As I’ve written before, I’m a capitalist, which means that I think the free market is the best system that has ever been devised. However, this doesn’t mean that everything the market does is good — remember, a market is just a mechanism. A mechanism for what? People to buy and sell. Unfortunately, people are incredibly, incredibly, incredibly stupid. They sell when they should buy, and buy when they should sell. People hate acting alone, so if they see a bunch of others doing something, they are much more likely to do it. Sometimes stock prices fall because a bunch of people are morons at the same time. Sad, but true.
- Market Shifts. Sometimes a market simply shifts a bit, there’s more demand, or less demand, or the market disappears altogether. For example, we all know that alternative energy is a huge topic right now, and stocks are exploding in worth. The reason is simple: we can’t use oil forever, and the government is about to put quadrillions of dollars into the alternative energy sector, meaning that there is a coming shift in the market. Businesses based on alternative energy will profit, meaning the alternative energy stocks might be a good call. Of course, that’s a big “might” — investing is always risky.
- Bad News. When bad news hits the press about a company that sells stocks, the stock prices almost always take a dip. For example, mid-2008, a rumor that Steve Jobs had a heart attack sent a shiver down the spine of Apple stocks, causing them to dip suddenly. Of course, the stocks did recoup, but a lesson is learned. If there is bad news then often stocks will go down, whether the “bad news” was completely legitimate or not. Of course, the of course, the opposite effect is seen for good news.
- Politicians. Politicians love to manipulate the markets, and shift money around. This means that every time the government spends money, then the entire market moves slightly. Money is poured into some areas, and some people get lucky … and some people’s lives are destroyed. If you know what the government is doing, you can invest before everyone else, meaning prices will be much cheaper and your return much higher. I’ll be writing a lot about this in the future, so make sure to subscribe to the free updates at the end of this free article.
This is, of course, is just the beginning, and is the bare surface of the many causes for stock prices to change. Just remember that the root cause of stock price changes is supply and demand. Everything listed above is simply a sub-cause rooted in supply and demand.
Of course, this information is useless unless you have a set way to interpret the information. There are many investing strategies, but only a few are the right ones. Your investing strategy should mitigate risk, increase your earnings and be as close to a “sure thing” as possible. The next article in this series is The 4 Investing Strategies That Work, and is required reading for anyone interested in learning how to invest in stocks.