Why do stock prices change? [duplicate]
"None of that is filtered my way as a ""part owner"". Sure it is, it's just not always obvious. When a company makes money it either: Other then the fourth option, the first three all increase the total value of the company.  If you owned 1% of a company that was worth X, and is now worth X+1, the value of that 1% ownership should go up as well. One model of the value of a share of stock is the present value of all future cash flows that the company produces for its shareholders, which would be either through dividends, earnings (provided that they are invested back into the company) or through liquidation (sale).  So as earnings increase (or more accurately as projected future earnings increase), so does the value of a share of the company. Also note that the payment of dividends causes the price of a stock to go down when the dividend is paid, since that's equity (cash) that's leaving the company, reducing the value of the company by an equivalent amount. Of course, there's also something to be said for the behavioral aspect of investing, meaning that people sometimes invest in companies that they like, and sell stock of companies that they don't like or disagree with (e.g. Nordstrom's)." "As I understand it, a company raises money by sharing parts of it (""ownership"") to people who buy stocks from it.  It's not ""ownership"" in quotes, it's ownership in a non-ironic way.  You own part of the company.  If the company has 100 million shares outstanding you own 1/100,000,000th of it per share, it's small but you're an owner.  In most cases you also get to vote on company issues as a shareholder. (though non-voting shares are becoming a thing).  After the initial share offer, you're not buying your shares from the company, you're buying your shares from an owner of the company.  The company doesn't control the price of the shares or the shares themselves. I get that some stocks pay dividends, and that as these change the price of the stock may change accordingly. The company pays a dividend, not the stock.  The company is distributing earnings to it's owners your proportion of the earnings are equal to your proportion of ownership.  If you own a single share in the company referenced above you would get $1 in the case of a $100,000,000 dividend (1/100,000,000th of the dividend for your 1/100,000,000th ownership stake). I don't get why the price otherwise goes up or down (why demand changes) with earnings, and speculation on earnings.  Companies are generally valued based on what they will be worth in the future.   What do the prospects look like for this industry?  A company that only makes typewriters probably became less valuable as computers became more prolific.  Was a new law just passed that would hurt our ability to operate?  Did a new competitor enter the industry to force us to change prices in order to stay competitive?  If we have to charge less for our product, it stands to reason our earnings in the future will be similarly reduced.   So what if the company's making more money now than it did when I bought the share? Presumably the company would then be more valuable. None of that is filtered my way as a ""part owner"".  Yes it is, as a dividend; or in the case of a company not paying a dividend you're rewarded by an appreciating value. Why should the value of the shares change? A multitude of reasons generally revolving around the company's ability to profit in the future." In addition to D. Stanley's very fine answer, the price of stocks change as a result of changing market conditions and the resulting investor estimation of its effect on the company's future earnings. Take these examples. Right now, in the USA, there is a housing shortage; that is, there are fewer houses available for purchase than there are willing buyers. Investors will correctly assume that the future earnings of home builders will be higher than they were, say ten years ago. Seeking to capitalize on these higher earnings, they will try to buy the stocks. However, the current owners of the stock, potentially the sellers, know the same thing as the investor-buyer and therefore demand a premium to entice a sale. The price of the stock has risen. The reverse is true, also. Brick and mortar retailers are declining as more consumers prefer on-line retail shopping. The current owners of these stocks will probably want to sell their stock before it is worth even less. The investor-buyer also knows the same facts; that future earnings will most likely be less for these companies. The potential buyer offers a very low price to entice a sale. The price of the stock has fallen. Finally, the price of stocks rise and fall with general market conditions. As an example, assume that next months jobs report is released showing that 350,000 new jobs were created in July. Investors will believe that if companies are hiring, then the companies are doing well; they are selling products and services at a higher than expected rate, requiring that they add new employees. They will also conclude that those 350,000 new employees will be spending their salaries to buy not just food, clothing and shelter, but also a few luxuries like a newer car, a TV, perhaps even a new home (please see paragraph 2!). All of these companies will have more business, more earnings and, likely, a higher stock price.
It might seem like the PE ratio is very useful, but it's actually pretty useless as a measure used to make buy or sell decisions, and taken largely on its own, pretty useless becomes utterly and completely useless. Stocks trade at prices based on future expectations and speculation, so that means if traders expect a company to double its profits next year, the share price could easily double (there are reasons it might not increase so much, and there are reasons it could increase even more than that, but that's not the point). The Price is now double, but the Earnings is still the same, so the PE ratio is double, and this doubling is based on something some traders know, or think they know, but other traders might not know or not believe! Once you understand that, what use is a PE ratio really? The PE ratio of a company might be low because it is in a death spiral, with many traders believing it will report lower and lower profits in years to come, and the lower the PE ratio of a given company gets probably, relatively, the more likely it is to go bust! If you buy a stock with a low PE ratio you must do so because you feel you understand the company, understand why the market is viewing it negatively, believe that the negativity is wrong or over done, and believe that it will turn around. Equally a PE ratio might be high, but be an excellent buy still because it has excellent growth prospects and potential even beyond what is priced in already! Lets face it, SOMEONE has been buying at the price that's put that PE ratio where is is, right? They might be wrong of course, or not! Or they might be justified now but circumstances might change before earnings ever reach the current priced in expectation. You'll know next year probably! To answer your actual question... first you should now understand there is no such thing as a stock that is on sale, just stocks that are priced broadly according to the markets consensus on its value in years to come, the closest thing being a stock that is 'over sold' (but one man's 'over sold' is another man's train crash remember)... so what to actually look for? The only way to (on average) make good buy and sell decisions is to know about investing and trading (buy some books, I have 12), understand the businesses you propose to invest in and understand their market(s) (which may also mean understanding national and international economics somewhat). how do they turn shares into cash that they can then use to grow their business? Once a Company issues an IPO or Follow-On Public Offer, the company gets the Money. Going over the list of question tagged IPO would help you with basics. Specifically the below questions; How does a company get money by going public in an IPO? Why would a company care about the price of its own shares in the stock market? Why would a stock opening price differ from the offering price?  From what I've read so far, it seems that pre-IPO an investment bank essentially buys the companies public shares, and that bank then sells them on the open market. Is the investment bank buying 100% of the newly issued public shares? And then depositing the cash equivalent into the companies bank account? Additionally, as the stock price rises and falls over the lifetime of the company how does that actually impact the companies bank balance? Quite a bit on above is incorrect. Please read the answers to the question tagged IPO. Once an IPO is over, the company does not gain anything directly from the change in shareprice. There is indirect gain / loss. A CFD is like a bet. Bookies don't own horses or racetracks but you still pay them and they pay you if the horses win. If you buy a CFD the money goes to the firm you bought it from and if the stock price changes in your favour, they will pay you. However, if it goes against you they may ask you for more money than you originally invested to cover your losses. Constacts for difference are derivatives, i.e. you gain on the change in the price or delta of something rather than on its absolute value. Someone bets one way and is matched with someone (or perhaps more than one) betting the other way. Both parties are bound by the contract to pay or be payed on the outcome. One will win and the other will necessarily lose.  It's similar in concept to a spread bet, although spread bets often have a fixed timescale whereas CFDs do not and CFDs generally operate via the payment of a commission rather than via charges included in the spread. There's more information on both CFDs and spread betting here If somone has a lot of CFDs that might affect the stock price if it's known about as others may buy/sell real stock to either make the CFD pay or may it not pay depending on whether they think they can make money on it. Otherwise CFDs don't have much of an effect on stock prices. "Firstly ""Most option traders don't want to actually buy or sell the underlying stock."" THIS IS COMPLETELY UTTERLY FALSE Perhaps the problem is that you are only familiar with the BUY side of options trading. On the sell side of options trading, an options desk engages in DELTA HEDGING. When we sell an option to a client. We will also buy an appropriate amount of underlying to match the delta position of the option. During the life time of the option. We will readjust our hedge position whenever the delta changes (those who follow Black Scholes will know that normally that comes from (underlying) price changes). However, we lose money on each underlying change (we have to cross the bid-ask spread for each trade). That is why we lose money when there is volatility. That is why we are said to be ""short VEGA"" or ""short volatility"". So one way to think about ""buying"" options, is that you are paying someone to execute a specific trading strategy. In general, those who sell options, are also happy to buy options back (at a discount of course, so we make a profit). But when doing so, we need to unroll our hedging position, and that again incurs a cost (to us, the bank). Finally. Since this is ""money"" stackexchange rather than finance. You are most likely referring to ""warrants"" rather than ""options"", which are listed on stock exchanges. The exchange in most regions give us very specific and restrictive regulations that we must abide by. One very common one is that we MUST always list a price which we are willing to buy the warrants back at (which may not be an unreasonable spread from the sell price). Since an Option is a synthetically created investment instrument, when we buy back the Option from the investor, we simply unwind the underlying hedging positions that we booked to synthesize the Options with. Source: I've worked 2 years on a warrant desk, as a desk developer." "This is a classic correlation does not imply causation situation.  There are (at least) three issues at play in this question: If you are swing- or day-trading then the first and second issues can definitely affect your trading.  A higher-price, higher-volume stock will have smaller (percentage) volatility fluctuations within a very small period of time. However, in general, and especially when holding any position for any period of time during which unknowns can become known (such as Netflix's customer-loss announcement) it is a mistake to feel ""safe"" based on price alone. When considering longer-term investments (even weeks or months), and if you were to compare penny stocks with blue chip stocks, you still might find more ""stability"" in the higher value stocks.  This is a correlation alone — in other words, a stable, reliable stock probably has a (relatively) high price but a high price does not mean it's reliable. As Joe said, the stock of any company that is exposed to significant risks can drop (or rise) by large amounts suddenly, and it is common for blue-chip stocks to move significantly in a period of months as changes in the market or the company itself manifest themselves. The last thing to remember when you are looking at raw dollar amounts is to remember to look at shares outstanding.  Netflix has a price of $79 to Ford's $12; yet Ford has a larger market cap because there are nearly 4 billion shares compared to Netflix's 52m." A stock market is just that, a market place where buyers and sellers come together to buy and sell shares in companies listed on that stock market. There is no global stock price, the price relates to the last price a stock was traded at on a particular stock market. However, a company can be listed on more than one stock exchange. For example, some Australian companies are listed both on the Australian Stock Exchange (ASX) and the NYSE, and they usually trade at different prices on the different exchanges. Also, there is no formula to determine a stock price. In your example where C wants to buy at 110 and B wants to sell at 120, there will be no sale until one or both of them decides to change their bid or offer to match the opposite, or until new buyers and/or sellers come into the market closing the gap between the buy and sell prices and creating more liquidity. It is all to do with supply and demand and peoples' emotions. "You can think of the situation as a kind of Nash equilibrium.  If ""the market"" values stock based on the value of the company, then from an individual point of view it makes sense to value stock the same way. As an illustration, imagine that stock prices were associated with the amount of precipitation at the company's location, rather than the assets of the company.  In this imaginary stock market, it would not benefit you to buy and sell stock according to the company's value.  Instead, you would profit most from buying and selling according to the weather, like everyone else.  (Whether this system — or the current one — would be stable in the long-term is another matter entirely.)" Also important to keep in mind is the difference in liquidity. The stock could be very liquid in 1 exchange but not in another. When times get bad, liquidity could dry up 1 one exchange, which results in a trading discount.