When I first started investing in stocks these questions puzzled me for a while. If you have the same questions, this post might help you.
How Is Stock Created?
Business needs capital for operation and growth. A common way to raise capital is to issue shares publicly. An investor can purchase shares and own a piece of the business. The business uses the investors’ money to grow its operations. When the business makes profits, it will issue dividends and the price of the shares might increase too, so investors are rewarded by receiving dividends or price appreciation.
How Are Stock Prices Determined?
After a business raises capital by issuing shares, the shares investors bought are also traded in a stock market, to allow investors to buy and sell different companies’ shares from each other. The price is determined by supply and demand. If the stock is popular and everyone wants to buy, buyers will push up the price. If the stock is unpopular and nobody wants to hold it, sellers are dumping the stock and the price of the stock will drop.
Why Do Stock Prices In A Whole Always Go Up In The Long Run?
Individual stock prices might raise or fall depending on the performance of the business, but the whole stock market tends to go up in the long run if the economy of that country is doing well. This is driven by the increase in productivity and earnings of the businesses within that economy.
If Stock Prices Always Go Up, Why So Many People Lose Money In Stocks?
One typical reason is insufficient diversification. If the investor only invests in a specific company or specific industry, there is a high chance that the company might not do well or the industry might not do well due to various reasons. Another reason is insufficient investment horizon. If investors invest at the market peak and the market falls 20% after that, the investors need sufficient time for the market to recover its loss. If investors are impatient to wait, a loss is inevitable.
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