How are Stock Prices Decided Upon?
If you purchase stocks, there are two main ways you can make money from the purchase. First of all, you can be paid dividends. When a corporation makes a profit, they may decide to pay some of it as dividends to their shareholder such as $1 a year per share, but this isn’t guaranteed.
You can also earn a profit through capital gain. When you buy stock, you will pay a certain price. If in the future the price goes up, and this is what you want it to do, you can sell it and make a profit. Subtract what you paid for what you sold it for and this is your capital gain.
When someone buys shares of stock, they do so in hopes of profiting through capital gains. High dividend paying stocks are often sought after by retirees who are looking for a stable source of income.
You can’t make capital gains unless the price goes up. (unless your selling short, but that’s an entirely different idea) Stock prices are always changing and can go up or down. What makes them change?
The price of stocks goes up and down the same way that the price of anything else goes up and down. It is an economic principle of supply and demand. Maybe you remember that from your economic class.
When the supply increases and the demand stays the same, the price will decrease. When the demand increases and the supply stays the same, the price increases. They vary inversely and the price adjusts along with them.
With stocks, if a lot of people want to buy a particular stock and not enough people are selling, they will have to raise the price to accommodate for it. If there are more people looking to sell than people willing to buy, they will need to decrease the price to get people to buy.
Once you understand supply and demand, you can understand how to make capital gains. You should try to purchase stocks that you feel will be a very popular buy in the future.
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