Someone who wants to buy a stock makes a bid of a certain amount of money per share and
announces how many shares he or she wants. Meanwhile, investors who want to sell their shares
are setting the asking price that would-be buyers will have to pay; this works a lot like an asking
price when someone is selling a house.
There are millions of people in the market and everyone
is trying to get the best deal they can, so prices can move wildly in just a few minutes.
Any number of factors can influence a company’s stock price, which is where the risk factor
comes in. Sometimes a company or a whole industry simply becomes fashionable or falls out of
favor, like Enron and many of the dot.com Internet companies did.
Investors also tend to react strongly to new information (or even rumors) that lead them to
believe that a stock price will move up or down.
New information that indicates a company is doing better than expected tends to make its stock
go up, while bad news can have the opposite effect as shareholders put their stock up for sale.
Investors are especially sensitive to news that affects a company’s profits because a company
that is making money (a profit) instead of losing money is obviously more likely to stay in
business and even thrive. Every company that has publicly traded stock is required by law to
report its financial performance every three months in a quarterly earnings report. This report
includes an estimate of how much money the company made (or lost) per share.
A good report
can mean good news for the stock price.
However, the reverse can happen as well, with stocks going down after a company reports good
news (maybe it wasn’t good enough) or up after a bit of bad luck (maybe it was better than what
most people expected)
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