There, I’ve asked the question you were afraid to ask, and
now I, your Dear Stock Leader, shall provide you the answer.
In all seriousness, I couldn’t answer this question until my
senior year of college; if I can learn about stocks and make them my living, I
have no doubt any of you with enough curiosity to read this can improve your
investments and money management skills.
OK, back to the question at hand.
When I was a stock layman, I knew you wanted to “buy” a
stock and, in theory, “sell” it for a profit in the future. What didn’t occur
to me was that there was another human being on the opposite end of my “buy” or
“sell”.
In other words, if I want to buy a share of Apple (symbol:
AAPL) for $450, there has to be someone willing to sell me a share for $450.
When that happens, a trade is made. THAT is what you see on the CNBC ticker:
The most recent price of trades in various companies, including AAPL.
So what I missed by not seeing the human element of all
stock trades was that the laws of supply and demand apply equally to stocks as
they do to anything people buy and sell. And moreover, while there’s a tangible
value to a stock’s earnings and/or dividend payments, every stock has an
intangible value that is based on MANY people’s opinion of how the underlying
company is doing presently and will do in the future. This is known as “the
market”, but you could easily call it “demand”.
Of course, demand can naturally be as fickle as the people
that create it, so indeed, understanding human nature and emotions is just as
important as understanding your favorite company’s financials.
Next time, I’ll continue this series with “What makes a
stock valuable, and how do I compare it to other stocks?”
