If you’re new to the stock market, you probably know that you can make money with stocks, you just don’t know how. How do stocks gain value and go up in price? First of all, when you learn how to invest money, you’ll learn that you can make money with stock market investments two ways: dividends and capital gains.
Dividends are quarterly payments that some corporations issue. It’s not required of corporations to issue dividends, and it isn’t always done on a regular basis. It’s a way for corporations to share profits with shareholders. As a shareholder, you are part owner of the corporation. Dividends are issued to you because you are entitled to profits in the company. However, dividends don’t have anything to do with the price directly. It can affect it indirectly by increasing or decreasing demand, which we will discuss later.
Capital gains are earned when you sell shares of stock for a higher price than you paid for them. You don’t incur capital gains unless you sell shares. Also, you could end up with a loss and no capital gains if you choose to sell your stock for a lower price than you paid. Capital gains are all about price. Many investors choose stock investments for the purpose of capital gains.
Supply and Demand
Supply and demand is the economic principle that determines prices in any market, not just the stock market. It can pull the price up or down on stocks, groceries, clothes, cars, or any other product or service. Supply and demand affect the price of stocks.
When supply increases, the price goes down. With stocks, as more people begin selling their shares, the price of that stock will drop. If there is more supply and not enough buyers, the price needs to decrease in order to get more people to buy it. As the price drops, demand should go up. When supply decreases, the price goes up. If there aren’t enough shares of stock to sell to the buyers that want them, the price goes up to get more people to sell.
When demand increases, the price goes up. Just as when the supply decreases, more demand requires a higher price to get more people to sell. The supply needs to be adjusted to meet demands. When the demand decreases, the price goes down to get more people to buy.
As you can see, supply and demand are constantly pushing and pulling each other. The supply needs to meet demand. If there aren’t enough buyers, the price needs to shift to either decrease the number of buyers or increase the number of sellers.
What Does this Mean to You as an Investor?
Understanding how the prices of stocks go up and down will help you better understand how to choose corporations to invest in. Use this knowledge while using fundamental analysis, or technical analysis if you’re a trader, to research and choose excellent investment choices.
Now that you know why stock prices do what they do, you can start learning how to invest and make actual investment decisions and purchases.