How The Stock Market Really Works

How The Stock Market Really Works

How The Stock Market Really Works

Many people buy and sell stocks, but few actually know how the stock market works. If you buy shares of stock in a company, you actually own part of that company. You and the other shareholders own the company in common. If the company you invest in has products and/or services the public really likes, along with solid earnings and sales, you and the other shareholders most likely will collectively benefit from the stock rising in price. In my opinion, the book value of a company doesn't mean too much. It is the earnings power that really counts.

For the most part, the stock market measures the vigor of American business. A key point to remember, is the stock market reflects economic conditions in a discounted manner. It looks ahead many months into the future, and is a reliable economic forecasting tool. The market will tend to start going up months before the end of a recession, and tend to start going down months before the end of a good economic cycle. The stock market has been quite accurate in this respect.

So, just what is a share of stock worth? Simply put, it is only worth what others are willing to pay for it at the time you want to sell it. If the company you invest in proves to be successful by having a consistent record of solid earnings and sales, there is a good chance your stock will be worth more than what you paid for it. If conditions were right, such as a strong general market, your stock will probably be worth a lot more than what you paid for it.

Stocks, like the price of most everything else, will be determined by the laws of supply and demand. If there is more buying enthusiasm for a stock, the price will go up. If there is more selling enthusiasm, the price will go down. Basically, the price of a stock represents the combined judgment of all the participants who are buying and selling a particular stock.

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