Changes

== Price of Stocks ==

== Price of Stocks ==

For example, the pricing of stocks freely traded on the stock exchanges is sometimes mysterious.  The value of a company’s stock reflects how much people are willing to pay for it.  A company that has one billion shares of stock in the market, valued at $15 per share, has a market value of $15 billion.  Logic dictates that when a stock increases its value, then the company is increasing its overall value.

The price of a company’s stock reflects the price at which people are willing to sell it (the supply price) and the price at which other people are willing to buy it (the demand price).  A "sale" of the stock occurs only when the supply price equals the demand price.  The overall value of a company at any given time is the price per share of its stock, multiplied by the number of shares of stock.  A company that has one billion shares of stock in the market, each valued at $15 per share, has a market value of $15 billion.  Logic dictates that when a stock increases its value, then the company is increasing its overall value.

But stock values, like economics in general, is about '''''the future''''' rather than the past.  Often a company announces a profit for the year, and yet its stock value goes down on the news.  That would be because people would not expect the company to be as profitable in the next year, in the future.  Past profits do not matter to the price of a stock today; profits in the future do.

Note that stock values, like economics in general, reflects the '''''future''''' rather than the past.  Often a company announces a profit for the year, and yet its stock value decreases on the news.  That happens when people do not expect the company to be as profitable in the future as it has been.  Past profits do not matter to the price of a stock today; profits in the future do.  General Motors was once the most profitable company in the world; now it is worthless, because it cannot make any profits in the future.

During the internet “dot-com” boom of the late 1990s, stock prices were increasing for companies that were losing money.  That was because people expected the companies to be very profitable in the future.  Sometimes it seemed like the more a dot-com company lost money, the higher its stock would go!  That was based on expectations about the future.  As it turned out, most of these companies went bankrupt, because the internet was profitable for only a few companies like Google.

During the internet “dot-com” boom of the late 1990s, stock prices surprisingly increased for companies that were losing money.  That was because people expected the companies to be very profitable in the future.  Sometimes it even seemed like the more a dot-com company lost money, the higher its stock would go!  That was very unusual, but was based on expectations about the future.  As it turned out, most of these companies went bankrupt, and the internet became profitable for only a few companies like Google.

 

The stock value in a company that consistently loses money declines to approach zero.  The stock value in a company that increases its profits each year increases to reflect those higher profits.

Stock prices on the New York Stock Exchange and NASDAQ (the stock exchange for new and often high-tech companies) are determined entirely by “bid” and “ask” prices of the buyers and sellers.  Someone will “bid” a certain amount to buy a stock, and a seller will “ask” for a certain price.  When the bid and ask amounts equal, then a sales transaction occurs.  Prices can move very quickly and unpredictably when millions of people are involved.

Stock prices on the New York Stock Exchange and NASDAQ (the stock exchange for new and often high-tech companies) are determined entirely by “bid” and “ask” prices of the buyers and sellers.  Someone will “bid” a certain amount to buy a stock, and a seller will “ask” for a certain price.  When the bid and ask amounts equal, then a sales transaction occurs.  Prices can move very quickly and unpredictably when millions of people are involved.

The price that a stock trades on the exchange is where the “supply” by sellers equals the “demand” by buyers.  When a seller of stock asks too high a price, then there are no buyers and the stock does not trade.  When a buyer of stock offers too little a price, then there are no sellers and the stock does not trade.  The transaction only occurs when SUPPLY EQUALS DEMAND.

As explained above, the price that a stock trades on the exchange is where the “supply” by sellers equals the “demand” by buyers.  When a seller of stock asks too high a price, then there are no buyers and the stock does not trade.  When a buyer of stock offers too little a price, then there are no sellers and the stock does not trade.  The transaction only occurs when SUPPLY EQUALS DEMAND.

Today we will discuss this important principle of economics and many of the surrounding issues.

This important principle of "supply and demand" is the most basic concept in all of economics, and next we explain it further.

==Supply and Demand==

==Supply and Demand==