Taking stock–buying and selling shares-PART 1
Posted on 23. Nov, 2009 by admin in Stocks
Did you know that when you buy a share, what you’re actually buying is a tiny piece of a company? Having a ‘share’ in a company is also known as ‘holding stock’ in the company. Today, the terms ‘stock’ and ‘shares’ have become pretty much interchangeable.
To create these shares, companies make them available by ‘floating’ on the stock market through an Initial Public Offering (IPO). Companies do this when they want to expand, and need cash to do so. The company is valued by a professional valuer and then broken up into a pre-determined number of pieces – or shares.
Once the shares have been sold, they can be traded an unlimited number of times on the stock exchange. Exchanges – like the Australian ASX – exist because the people who bought the stock initially don’t want to keep it forever. Ultimately they’ll want to sell their shares, to make a profit if the price goes up, avoid further losses if the price falls, or to convert their shares to cash. So after the initial IPO, the company doesn’t make any more money from the buying and selling of its shares. All that profit (or loss) goes to investors.
So, we know the value of shares goes up and down, we see it on the news every day. But who, or what, determines the value of your shares?
The people, companies and stock exchanges that participate in the buying and selling of shares, are known collectively as ‘the market’. It’s the market that determines the value of your shares. So how does it do this?
The truth is that the value of your share is determined by perception – what the market thinks the company you hold stock in is worth. This psychology can be influenced by all kinds of things – product announcements, mergers and acquisitions, executive team changes, etc. So the share price simply reflects what people who want to buy a share in the company are prepared to pay, and the price those who are selling shares in the company are willing to sell for.
** Part 2 of this article will cover how shares are traded and how people approach investing.
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Daniel Kertcher has taught more than 100,000 people how to trade the stock market since he established his company, Platinum Pursuits, in 2001. He holds DFP and PS146 qualifications as well as ASX qualifications in options. He has authored two books on stock market trading, as well as the world’s only options trading board game, Call Up Put Down.