subject: The Fundamentals of Stocks [print this page] The Fundamentals of Stocks The Fundamentals of Stocks
The Fundamentals of Stocks
Stocks assist companies with financing. They help the company with purchasing assets required for operations. When a company becomes available to the public, it has the right to issue stocks. These stocks can be purchased and resold (as shares dividing the company). Companies trade to gain equity. Yet the individuals purchasing the stock can also benefit. Gains can be made through the trading of stocks. This is typically done by buying a stock that is undervalued and selling it when the price rises. Through basic demand fluctuations, the price of a stock rises and falls. The price value is decided by the company. When the demand increases, so does the price. More people want to buy more of the stock and become shareholders. The opposite happens when demand falls. The value of a stock is driven by the purchases made. When more people are buying it, the stock prices get pushed up by the company. This explains the impact of mergers on stock prices. The news people hear in the media causes them to buy more of the stock. The fact that there is high demand is the reason for increasing value.
Individuals that wish to benefit from trading have different approaches. There are many ways to analyze and interpret stock values. Many traders have to first make the decision if they want to be a short-term or a long-term trader. An example of a short-term trader is the day-trader', someone that has the goal of making profit within the day. Therefore strategies are based around that time frame. The long-term trader has the basic focus on growth. When purchasing, he or she is looking at the potential of the stock, and where the stock values seem to be heading in the long-run. Warren Buffet was well known for his long-term strategies. Much of his focus was on picking the right stocks, and having them grow in the long run.
There are many factors to consider when looking at stocks. First and foremost, one should consider the quality of the company being invested in. Is the company doing well? Indicators such as earnings per share' or debt to equity' ratio can help with making such decisions. It is important to analyze the profitability and growth potential. The company's financial statements, that are publically available, are also useful to help make such decisions. An investor would also look at the basic trends. Graphs showing price valuations follow patterns that can be explained through analysis. Certain trends are repetitive and basic decisions can be made. Such decisions would involve buying or selling the stock. If the stock has enough reasoning to go up in price, it is best to buy the stock. If the holding stock has its price going down, then selling it is the best decision to make.
Written by Basim Mirza
Sources Used:
Simon Johnson. Warren Buffett Bets on Growth in Emerging Markets (and Against the Dollar). Peterson Institute for International Economics.
http://www.iie.com/realtime/?p=1015
Wikipedia. Stocks. Peterson Institute for International Economics.
