How do Stock Prices Work?
When you buy stocks, you have two ways to make money. You can make money through dividends that the company pays for each share you own. For example, they might pay 25 cents per share each quarter. Dividends are not guaranteed, though.
Capital gains are another way to profit from stock purchases. You buy the stock at one price and at a future time, whether it’s in an hour or in 20 years, you sell it for a higher price. After you take the difference, the amount you sold it for over the amount you paid is a capital gain.
When someone buys shares of stock, they do so in hopes of profiting through capital gains. High dividend paying stocks are often sought after by retirees who are looking for a stable source of income.
In order to make capital gains, the stock price has to go up. The stock price can go up or down. It varies from day to day. How can you know it will go up and how exactly does it change?
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Do you remember the principle of supply and demand that you learned in your high school economics class? It is a basic term that explains the change in stock prices just as the change in prices of any other goods or services.
An increase in supply with the same demand will decrease the price. An increase in demand with the same supply increases the price. The price changes depending on whether and how supply and demand change.
With stocks, if a lot of people want to buy a particular stock and not enough people are selling, they will have to raise the price to accommodate for it. If there are more people looking to sell than people willing to buy, they will need to decrease the price to get people to buy.
Once you understand supply and demand, you can understand how to make capital gains. You should try to purchase stocks that you feel will be a very popular buy in the future.
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