Monique Frances B. Rapacon
BS Accountancy IIA
How the stock market operates
Stock market is a place where you can buy and sell shares in a company. When a company makes shares available for the public to buy they are called stocks and this is what you are trading. In most cases what you get when you buy a stock is a very small piece of the company. You are an owner of that company and as it grows the company should become more valuable which means that your stocks should become more valuable as well. At least that is the theory but in practice there are other things that affect the stock price as well. Like anything that is being bought and sold stocks are subject to the law of supply and demand, since the number of shares is limited when the number of people who want to buy those increases the price will go up. On the other hand when the number of buyers declines, or the number of people who want to sell increases then the price will go down. In theory the demand is based on how profitable the company is but in practice it is based mainly on expectations of what the company will do in the future. Since the goal of investors is to get the maximum return on their investment the goal is to buy the stock before the price goes up and then to sell it before it goes back down. This means that you have to pay attention to what the value of the company you are buying stock in will be in the future. This is why you often see the price of the stock go up before an earnings announcement and then decline even if the earnings were higher than expected. People bought the stock in the expectation of good earnings which drove the price up and then sold when the good earnings were announced since it was likely that the stock’s value had peaked, at least temporarily. One thing that confuses a lot of people when the invest in the stock market is that they don't receive any of the company's profits. After all as an owner you would normally expect to. In a few cases you will,...
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