Posts Tagged ‘stock prices’

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.

Why would a company split its stock?

Tuesday, December 22nd, 2009

A company’s value is basically spread out among its shares; the more shares there are, the smaller the percentage of the company each one is worth. Think of it as a simple equation: value of one stock = value of the company ÷ number of shares. So if a company wants to try to manipulate the price of its stock, it has to change some part of this equation. You can’t change the value of your company at will, of course; that depends on your market performance. But companies can change the number of shares they offer, and hence the price per share, by using stock splits and reverse stock splits.

Stock splits are just what they sound like – splitting a single stock into multiple stocks. The most common stock splits are 2-for-1 and 3-for-2. A reverse stock split is also just what it sounds like – in, say, a 1-for-5 split, every five shares become one. Because a company can’t just suddenly generate value, a stock split means stock prices also split: for example, in a 2-for-1 split, each share becomes worth half of its original price. As a shareholder, you don’t have to worry about stock splits because the company will make sure the value of your holdings doesn’t change – if the stock goes through a 2-for-1 split, your shares just double, so you still have the same amount of money.

If the value doesn’t change, why bother fooling around with the number of stocks? If a company is doing very well, a single stock can grow to be worth a huge amount of money. You can’t buy a fraction of a share, and if you have to shell out a huge amount of money just to buy a single share, you probably won’t bother. So splitting the stock makes the price of each individual share go down, and more investors can afford to buy. A reverse stock split happens when a company’s stock prices are low; when the number of shares decrease, the price of a share increases, and the company’s stock appears more attractive to investors.