Let us start from the basics. When a company is started, it needs a capital for its startup. Capital is all the money that is invested to start a business. Capital can be raised in two ways. One is by borrowing money, which will be paid back later. Second option is issuing stock to those, interested in sharing the profits of the company. By this we mean, people who buy the stock will help in the venture of the company in return of which they will have a share in the profits the company makes. By issuing stock, the company can raise more capital and it does not have to bear the interest as in case of repayment of debt. But one of the disadvantages involved in issuing stock is that shareholders share the company ownership and have a say in deciding the company policies.
What causes stock prices to go up and down?
Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.
The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.
It's a fairly straightforward connection to make that stock prices are somehow related to a company's earnings. But exactly what makes stock prices move, and how? It's important to understand the answers to these questions so that you can develop a reliable investment strategy. The fact is that a stock's price rises or falls based on changes in the market's perception of the stock's future earnings and the confidence (or lack thereof) investors have that those earnings will be achieved.
