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Stock Market Information > Why Prices Rise
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Investing in the Stock Market - Why Stock Prices
Rise and Fall
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There are many reasons
that lead to the rise and fall in individual
stocks and the stock market in general, but the
major reasons are pretty easy to understand. The
value of an individual stock, like anything you
would buy at the grocery store, is based on what
people are willing to pay for it. When the grocery
store charges $1.69 a pound for broccoli, it sits
on the shelves until it withers and rots because
nobody wants to pay that much for their green
vegetables: when the price is set at $0.99 a
pound, people start to buy it again, because it's
a reasonable cost. Remember: stocks started out
sold on street corners and corner
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stores, just like
broccoli: if people believe that a portion of a company
is worth $10 or $43, they will ask to buy it.
Because of the way the stock market works, the bids
people make for stock purchases are traded against the
number of shares available at any one time, so that if
everyone knows that something terrific has just happened
at one company, like a merger or a fabulous new product,
they feel optimistic about the company's prospects, and
will be willing to pay more for a share in that company.
Because buying a selling of stock goes quickly, by
phone, fax, email and wire, shareholders' and potential
shareholders' beliefs are transmitted immediately to the
market, affecting the price of the stock much faster
than refusing to buy broccoli will change the price in
broccoli.
On the other hand, when something bad befalls a company,
people often want to return their shares in exchange for
cash before it all falls apart. When Martha Stewart went
to jail, stock prices for her company dropped, and when
it became clear to everyone that she was still able to
run a profitable corporation, stock prices rose again.
The people who held onto their stocks while Martha
served her time were smart not to cut and run: the
people who sold after the price dropped lost money
because they weren't willing to take the chance that the
company would recover.
There are lots of things that can affect the public's
perception of a corporation, and one of the things that
stock traders and scammers rely on is the idea of the
"inside tip". When people hear that a certain company is
going to undergo a major gain or loss in fortune,
especially when they believe that not everyone knows
about the change, they react by wanting to get in on a
good thing, or get out before everyone else does. Using
what they call "insider knowledge" is technically
illegal—that's how Martha Stewart ended up in prison.
But that doesn't stop people from thinking longingly of
the chance that one lucky day, they will get drunk with
a high-powered corporate executive who will unloose a
top-secret plan for a hostile takeover of Pepsi by Coke
in just enough time for them to buy a thousand shares of
Coca-Cola and get filthy, stinking rich. We are, after
all, only human.
You don't have to have an inside tip to make decisions
about buying or selling stocks based on what you've read
in the newspapers, but in general, people make money off
the stock market by buying nice, safe, conservative
stocks and holding onto them like grim death for years
and years. It's not sexy, but it works. If you buy
shares in diverse, long-lived companies that have done
all right and earned lots of money over the last ten or
twenty years, your money will probably grow at a rate of
around 10% a year. That's a ballpark figure, but over
time, given the stock market's history, it's a pretty
safe bet, and it's a lot better for growth than stuffing
your money into a mattress or putting it into your
bank's savings account, where you'll be lucky to get 3%
interest.
People who make fortunes in the stock market, usually
start out by investing a smaller fortune. Some people
speculate on stocks, buying only when share prices have
dropped and they believe the drop is temporary, or
buying newer stocks at low pieces, in the belief that
they will someday rise again. People who make their
money speculating on the stock market do so because they
think they may make more than they would in safer
investments like CDs or bonds.
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How to stick to a household budget
and have extra
money for investing
1. Customize your budget with your current needs, wants and future goals in mind.
2. Try to think if your budgeting plan as a "spending" plan rather than penny pitching.
3. Sit down and rationally discuss budget goals and spending limits with your spouse. You are bound to disagree somethere, but it important to take the time to find common ground.
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