Posts Tagged ‘stock market’

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What makes a stock price go up and down?

Tuesday, August 2nd, 2011

At the most basic level, stock prices are related to demand. When many people want to buy stock in a certain company, the stock price goes up, and when a lot of people are trying to get rid of a stock, its price goes down. But there are several other factors that go into a stock’s price.

If investors think a certain stock will do well, they will buy it and its price will go up; the reverse is also true. Stocks don’t exist in a vacuum, so their environment (both in general and specifically) affects their price. How is the company that owns the stock doing? Has it released positive earnings reports or a new product that shows promise? Investors also examine the social and economic climate in general – interest rates, political interest in certain businesses, and so on. Lastly, there’s the market itself to consider: during a bull market, everyone is buying stock, so stock prices in general tend to go up.

The stock market is tricky because it relies so much on anticipating things before they actually happen. A stock’s price will go up if it is popular, but investors may also buy that stock because they think it will become popular in the future. If enough people have this hunch, investing can become a self-fulfilling prophecy.

Lessons From the Crash: Frank Murtha, Market Shrink (2 of 4)

Monday, April 18th, 2011

Frank Murtha is a psychologist with MarketPsych who specializes in investor behavior. Or misbehavior. Or misconceptions. Well, all of that. His job is to study how people make decisions with their money, and to help us understand (and avoid) common mistakes.

He stopped by to talk to us about how a crashing stock market changes the way investors invest. (Hello, recession of 2008!) Pretty interesting stuff. Check it out:

>> TILE brings you exclusive opinions, explanations, and interviews from experts in every industry. Have a burning question or an expert you’d like to see interviewed? Just Ask TILE!

How the Stock Market Reacts to a Natural Disaster

Friday, March 18th, 2011


(photo credit: ehnmark)

After so much media coverage devoted to videos of water swallowing up cities, we were interested to see this Reuters article from Monday about the financial implications of Japan’s bad luck.

The stock market is operating under very rare conditions, and some of the news was really surprising. For example, this is the worst hit the market has taken in two years… but it’s the worst natural disaster the country has ever seen. Why didn’t the markets totally crash?

As a matter of fact, some stocks and sectors were actually doing very well on Monday. Here are some interesting facts from the report:

  • - The construction industry was booming, probably because demand for rebuilding will soon be enormous.
  • - Stock in the company that owns one of the nuclear power plants in danger of meltdown – Tokyo Electric Power – dropped 24% almost immediately.
  • - The technology sector, once one of Japan’s strongest, took a nosedive.
  • - Investors were selling off their long-term bonds* (20 years or more), which means that they’re not confident Japan will be able to repay their bond debts in the future.
  • - The earthquake happened on Friday. By Monday, the Bank of Japan was ready to announce that it would inject 15 trillion yen (about $187 billion) into the economy to support it during the crisis. (Kind of like the U.S. Treasury has been doing here to keep the economy afloat during the recession.)
  • - This vote of confidence inspired investors to purchase more short-term bonds (10 years or less).

This just goes to show you that changes in the stock market are all about what investors predict. These predictions can be rational or irrational, but the speculation never ends – no matter what happens.

* A bond is a kind of debt sold by governments and corporations to raise money. Basically, when you buy a bond, you’re buying the seller’s promise to pay you back (usually with a fixed interest rate) on a predetermined date.

The Calvert Social Index is…

Wednesday, October 6th, 2010

The Calvert Social Index is a stock market index of companies that are considered socially responsible. It was created by Calvert Investments and uses Calvert’s social criteria to determine whether a company is socially responsible or not. This criteria relates to the environment, product safety, community relations, international operations, weapons contracting, human rights, and workplace issues. While the number changes frequently, as of August 2010, there were over  650 companies in the index.

What does it mean to take a company public?

Wednesday, October 6th, 2010

When a company “goes public” it means that it has decided to expand its ownership to include shareholders from the general public. When a company first goes public it’s called an IPO, or initial public offering. Proceeds (or the money raised from the IPO) can be used to fund further growth or to reward original shareholders (a “payout”). When a company is public, it breaks itself up into shares of stock available to be bought and sold by investors. In the U.S. public companies must register with the Securities and Exchange Commission (SEC) a government agency that regulates U.S. financial markets.  Public companies are also required to file public financial statements with the SEC every quarter.

This isn’t true for every company, though. Many companies are “privately held,” which means that only a few people own the company and benefit from its success. In other words, if someone has created a great new company and gone public, anyone can invest their money in that company and share in its success (or, let’s be honest: failures). Private companies are not required to disclose financial information to the public.

Culprit In ‘Flash Crash’ Identified

Monday, October 4th, 2010

How one company broke the Internet stock market.

  • The SEC and FTC just completed their report on the May 6th “flash crash” that resulted in a sudden loss of more than 600 points on the Dow Jones Industrial Average. The market rebounded, but not before a few trader meltdowns.
  • The report says that the crash resulted from a single big trade, which happened to be executed on a day when the market was already unstable due (in part) to fears about European debt.
  • Apparently a large trading company (which the WSJ identifies as Waddell & Reed Financial, a mutual fund company in Kansas) sold tens of thousands of futures contracts using a computer trading program. The sudden sale scared day traders into dumping their futures contracts and further destabilizing the market.

Facts & Figures

  • The DJIA’s 600-point crash was its fastest decline ever.
  • The trade in question involved selling over $4 billion in futures contracts at one time.
  • A total of 75,000 futures contracts were sold.

Strong Quarter, Weak Economy?

Friday, July 16th, 2010

Although second quarter reports look strong, the economy may start to level out.

  • Fear of an economic slowdown caused the stock markets to dip.
  • Airlines are expected to make their first annual profit since 2007  due to fuller planes and higher fares.
  • Stronger Asian economies are increasing exports, which helps struggling U.S. shipping companies.
  • Despite all this, there has been poor job growth in the U.S in the past few months.

Facts and Figures

  • New home sales fell 33%, and existing home sales fell 2.2%.
  • Air shipments (mostly Asian exports) increased 30% from last year.

Best Quote

“Bottom line is earnings may hold up, but sales growth is slow and companies aren’t going to invest their record cash holdings until it improves.” – Howard Silverblatt, Senior Index Analyst of Standard & Poor

What’s the difference between stocks and bonds?

Wednesday, January 13th, 2010

When you buy stock, you own equity – that is, you are actually buying partial ownership of a company in the form of shares. The percentage of the company’s total shares that you own is how much of the company you own – for example, if the company has 100 shares and you buy 50 of them, you own 50% of the company. This means that you share the company’s ups and downs: if the company does well, your stock becomes worth more than what you paid for it, and you make a profit, but if the company does badly, its stock decreases in value, and you suffer a loss. Equity holders are last in line among creditors if the company’s value goes to zero. This is why the stock market always has a certain amount of risk attached: you can never know for sure what’s going to happen to your stock.

With bonds, on the other hand, you virtually always know exactly what you’re going to get. Bonds are not shares, so they don’t give you any ownership. Rather, when an institution wants to raise money, it sells bonds, which are like IOUs; they’re basically promises to pay your money back later, with interest in the meantime. The interest rates are usually fixed, so you can calculate your profits. For example, a company could sell you a bond for $1,000, and under the terms of the agreement, you’d get 5% of that $1,000 every year for the next ten years, and then your original $1,000 back at the end of that decade. Of course, this means you’re only going to make a profit of $500 over ten years, but you are guaranteed that money.  If the company goes bankrupt, bond holders are usually first in line to be paid among those owed money. So people who prefer bonds like the security they offer, and people who prefer stocks like their potential to make their owners an incredible profit in the future.

One final note – there are three main types of bond: government, municipal, and corporate. Government bonds are sold by the government, municipal bonds by cities, and corporate bonds by companies. Government bonds are the most secure, followed by municipal, then corporate (because a company is much more likely to go bankrupt than a government is). However, because corporate bonds are the most risky, they also offer the highest rates of interest.

Why can it be good to borrow money?

Friday, October 23rd, 2009

It’s a good question: loans come with interest, so you always have to pay back more than you borrowed. How is borrowing possibly a good idea?

Say you want to buy a house. Houses aren’t cheap, but they’re generally necessary (unless you want to live in your car). Especially if you’re fairly young and just starting out, chances are you probably can’t afford to just drop the full value of that house, in cash, up front, into the seller’s lap. But if you take out a mortgage to pay for the house, you can pay it back a little at a time. True, you’ll end up paying back more over time than if you’d just paid up front, but presumably you’ll be making more money as your life progresses, and then mortgage payments will count for less of your budget.

NASDAQ? DOW? S&P 500? Huh?

Wednesday, October 7th, 2009

With so many abbreviations running around the finance world, it’s only natural to be a bit confused.

These terms are often used in the news to give you a sense about the state of the economy. If the DOW is up, it’s a good thing and if it’s down, it’s not so good. But what’s the difference between these terms?

You can basically break them down into two categories: stock exchanges and stock indices. Stock exchanges are where different stocks are bought and sold – similar to a grocery store for household goods. Stock indices, on the other hand, measure a specific segment of the stock market by tracking the stocks of a particular group of companies – you could create indices that track car, agricultural, or computer companies.

NASDAQ is a stock exchange where over 5,000 different stocks are traded, while the DOW and the S&P 500 are stock indices. The DOW focuses on 30 of the largest American companies and the S&P focuses on 500 of the strongest American companies.

By looking at the performance (or daily change in value) of various stock exchanges and stock indices, investors are able to measure the strength of different sectors of the American economy.

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