I'm glad you are all enjoying this series on basic stock market questions! Hopefully you all understand just how important it is to know and understand the investing process, whether you are in the market or not. Please keep sending your questions my way and know that there are no stupid questions when it comes to investing! EMAIL ME BY CLICKING HERE!
Why do companies issue shares of stock in the first place?
Ultimately the major stock exchanges allow companies to issue shares, or part ownership of their company to the public in exchange for cash. The amount of cash they get from issuing shares depends on two things: how many shares they issue and how much each share is worth. Very frequently, companies need cash to grow their business and so they issue shares to obtain cash because this is a far easier process than getting funding from a bank in the form of a loan. This is because the company may already have bank loans due to their business plan or may not be able to raise enough cash to fund their current loans. So companies will issue new shares of stock as a way to get around this. If the company is successful in growing out its business, they will buy back their shares from the general public at a fixed price. This is usually a very good sign that the company had met its goals and buys back shares with the intention of issuing them again in the future at a different price to fund another new part of their business.
Why do stock prices go up and down?
Oh boy, there are SO many factors that contribute to stock fluctuation - although this is a very good question! Some factors that contribute to ups and downs include but are not limited to: media events, the opinions of investment banks or well-known investors, natural disasters, political/social/economic unrest, risk, terrorism, supply and demand of certain products and commodities, technology hacks, economic data, or earnings releases. It is a combination of these factors and all relevant information about the stock that results in a specific sentiment expressed by investors about the stock. If there are more buyers than sellers, the sentiment is bullish and the stock price goes up. If there are more sellers than buyers, the sentiment is bearish and the stock price goes down.
Why do the experts have a hard time predicting exactly how the stock market will perform?
As with anything in life, a prediction about the future is never necessarily a factual statement about the future. Even predicting that the sun will rise in the East tomorrow is a prediction. First, let's assume that the stock prices have been increasing for several years. Smart investors know that this cannot go on forever and so a correction must take place and prices will begin to fall. What many fail to understand is exactly when the correction will take place and exactly what will be the event to trigger it. There is no scientific measurement to know when this will happen - otherwise everyone would be rich - but there are instead several key factors that investors will look for to determine when they will buy and sell based upon what the market is doing at that given time. Make sure you keep reading GradMoney.Org to learn about all of these ways.
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