How do Stock Prices Work?

There are basically two main ways to profit from buying stocks. First, many corporations pay dividends to their shareholders. They may pay 50 cents per quarter for each share you own. This is not required of a corporation, so you may or may not be paid dividends.

The other way to make money is through capital gains. This means that you have bought the stock at one price and then sell it at a higher price. The difference between the price paid and the price sold is your capital gains.

When investors purchase stock, they are doing it in hopes of making capital gains. Those in retirement usually look for dividend paying stock because it is a stable source of income. Otherwise, dividends are just a bonus to the investment.

You can’t make capital gains unless the price goes up. (unless your selling short, but that’s an entirely different idea) Stock prices are always changing and can go up or down. What makes them change?

Stock prices are affected just as the price of anything else changes. It is purely economics. Try to think back to your high school economics class when you learned about supply and demand.

It’s all based on whether supply and/or demand go up or down and buy how much. An increase in supply will lower the price whereas an increase in demand will increase the price.

Stock prices change depending on who is willing to buy and sell. If more people want to buy a particular stock than there are enough people to sell it to them, they have to increase the price. If more people want to sell a particular stock than there are enough people to buy from them, they have to drop the price.

If you understand how this works, you can better understand how to make money with stocks. You want to buy stocks that you think a lot of people will be buying in the future so that the price goes up.

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