Library: Investing ABC’s

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Investing ABC’s
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How Stocks are Priced

Stocks have feelings too you know…

Stocks are priced the exact same way that everything else is priced. That is to say, there is no one way but rather a number of factors that help establish price. And when those factors change, the price changes alongside it.

Knowing what causes prices to move is instrumental in understanding the stock market. Here’s a list of that will show you how stock prices are priced.

#1. Push & Pull

Stock prices change every day based on supply and demand. Simple as that. If there are more people willing to buy the stock than to sell it, the price will rise. Imagine you have a baseball card. The card all of a sudden becomes extremely popular (maybe the player had a great season). Because the card is more popular, more people would want to buy it and therefore you could charge more for it, if you wanted to sell it.

Same thing with the stock market. If you held stock in Google and the company all of a sudden rose in popularity (maybe they launched a new product), then it would be more valuable and you would be able to sell it for a higher price.

How can you use this? Look at the volume as well as the bid and ask price. If volume is abnormally huge, and the bid and ask price seem to be increasing, that means that more people are buying and the price is headed up.

#2. Crystal Balls ain’t got nothin’ on Pric

Stock prices include everything that is public information, from fact to speculation. By the time the average investor learns of some news, the stock price has already adjusted to reflect the impact of this news on the company. This includes news about things that have happened, as well as things that might be expected to happen, aka, the past and the future.

Case in point: When Apple announces that it is coming out with a new product line, its share prices jump in excitement. Why do they jump? It’s not as if Apple has sold that product and made a profit yet. The answer is because people expect that Apple will sell the product and make a profit, and so they are willing to pay a higher price for it causing the price to jump up.

How can you use this? Check out our Stock Talk to get an idea as to what people expect for this stock.

#3. Leaning on professional advice

An appraiser will tell you what your house is worth. A petroleum engineer will tell you what an oil reserve is worth. Similarly, an analyst will tell you what a stock is worth. Analysts spend day and night researching companies so that they can put the right price on them. They then use this price to recommend whether to buy or sell the company. So when the analyst recommends buying or selling a stock, it eventually becomes a self-fulfilling prophecy.

For example, Netflix Inc. lost over 3% in July, 2011 after analysts at Financial Crest downgraded their buy recommendation for NFLX.

How can you use this? Use our WSS rating that incorporates analyst recommendations as well as our own “secret sauce” to buy or sell stocks.

#4. Battle of the Bulge

In the stock market, there are different sized players. Some have little money and hence limited impact on stock prices, and some play with so much money that they can actually change prices on the stock market. These huge ones are most often funds (mutual funds, hedge funds, Exchange-Traded funds) that are dealing with A LOT of money. We’re talking millions and billions. And when they decide to buy or sell something, they generally go big.

This size factor actually works to “move the market”. Imagine one of these funds needs to get out of a certain stock that it holds millions of shares of. First, the broker will have to find buyers for this gigantic transaction, and then sell it to them for cheaper and cheaper until it gets rid of all the stock. This causes the price of the stock to decrease.  It’s like the difference between buying one small bottle of liquid soap, or a gallon of it from Costco. The more they sell, the more the price decreases per unit.

How can you use this? Use Stock Twits on Wall Street Survivor to follow news on funds that hold the stock, and trade based on what they’re doing.

This is not the end


Stock Prices might seem completely random and obscure, but there is a science behind them. Hopefully this list gives you an insight about what moves the prices up and down. As always, practice makes perfect, so trade on Wall Street Survivor and come up with your own theories about what moves the market.

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