stock prices

investing for beginners

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stock prices

investing for beginners

How are stock prices set? How does the market value companies? These are key questions you need to be able to answer to understand how to invest.

what's in this lesson?

How are stock prices set? How does the market value companies? These are key questions you need to be able to answer to understand how to invest.

overview

We just talked about how the stock market functions, but let’s take some time to talk through stock prices. Why do they go up and down by the second? While the answer is not necessarily straightforward, we’ll try to simplify it as best we can.

 

Stock Prices

 

From a technical perspective, a stock price is determined by two factors–the market’s estimate of the financial value of the company (we’ll dive into this one down below) and the total number of shares that the company has “outstanding” meaning the total amount of shares that the company has available for ownership. The total number of shares can grow, but most often the price of a stock changes because the market has changed it’s estimate of the value of a company. What does that mean?

 

Company Valuations

 

“Company valuation” is a key term necessary to understand how company stock prices go up and down. Investors think about company valuations generally in terms of future growth or profitability for a company. So if you are looking at the price of Apple stock, when you see it go up it’s likely because the investor community sees reason to believe that the company will grow more or be more profitable in the future, and when the price goes down it’s because the investors think that there is reason for growth to slow or profitability to decrease.

 

What might sway investors to think differently about Apple’s growth and profitability prospects? A few things, actually:

 

Apple might release some financial data about how it’s been performing (they’re required to deliver quarterly earnings reports as a public company), or announce a new strategy change or new product that investors like or dislike. A new company entering the market might signal risk to investors that would affect the stock (think about what might happen to Peloton stock if Apple said it was going to start making exercise equipment!)

 

Something specific to the company could change–let’s say a key executive departs, or the price of the glass that Apple buys to make iPhone screens increases. The investor community might see those as reasons for pessimism.

 

Or something might happen in the broader economy that signals changes for the company. News about economic expansion in China, for example, might mean more people there will be buying iphones and Apple would be poised to take advantage. Investors could look at any of these things and decide that Apple is going to do better or worse in the future, and assign a different value on the company, which affects the share price.

 

Because we’ve been talking about Apple, we wanted to show you how this looks in practice. Check out the Apple Yahoo! Finance page for some key data points on how the stock has performed recently given the global recession brought on by coronavirus, as well as how reported earnings have changed its price per share.

 

Come with us to the next lesson as we talk through investing risks!

 

Source(s): Investor.gov, Zacks

overview

We just talked about how the stock market functions, but let’s take some time to talk through stock prices. Why do they go up and down by the second? While the answer is not necessarily straightforward, we’ll try to simplify it as best we can.

 

Stock Prices

 

From a technical perspective, a stock price is determined by two factors–the market’s estimate of the financial value of the company (we’ll dive into this one down below) and the total number of shares that the company has “outstanding” meaning the total amount of shares that the company has available for ownership. The total number of shares can grow, but most often the price of a stock changes because the market has changed it’s estimate of the value of a company. What does that mean?

 

Company Valuations

 

“Company valuation” is a key term necessary to understand how company stock prices go up and down. Investors think about company valuations generally in terms of future growth or profitability for a company. So if you are looking at the price of Apple stock, when you see it go up it’s likely because the investor community sees reason to believe that the company will grow more or be more profitable in the future, and when the price goes down it’s because the investors think that there is reason for growth to slow or profitability to decrease.

 

What might sway investors to think differently about Apple’s growth and profitability prospects? A few things, actually:

 

Apple might release some financial data about how it’s been performing (they’re required to deliver quarterly earnings reports as a public company), or announce a new strategy change or new product that investors like or dislike. A new company entering the market might signal risk to investors that would affect the stock (think about what might happen to Peloton stock if Apple said it was going to start making exercise equipment!)

 

Something specific to the company could change–let’s say a key executive departs, or the price of the glass that Apple buys to make iPhone screens increases. The investor community might see those as reasons for pessimism.

 

Or something might happen in the broader economy that signals changes for the company. News about economic expansion in China, for example, might mean more people there will be buying iphones and Apple would be poised to take advantage. Investors could look at any of these things and decide that Apple is going to do better or worse in the future, and assign a different value on the company, which affects the share price.

 

Because we’ve been talking about Apple, we wanted to show you how this looks in practice. Check out the Apple Yahoo! Finance page for some key data points on how the stock has performed recently given the global recession brought on by coronavirus, as well as how reported earnings have changed its price per share.

 

Come with us to the next lesson as we talk through investing risks!

 

Source(s): Investor.gov, Zacks

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