How Stocks Are Valued

Stock Market For Dummies Lesson 2 - The stock market is a strange beast and the longer you are stock market investing the more you realize this. If a company is making a lot of money, logic dictates that the stock price will be high or at least going up. This is not always the case, however, as the one thing you must understand is that supply and demand is the most important determinant of a stock's price.

Even if a company is making lots of money today, they might have told investors that the future does not look so bright. If in the future sales are expected to slow down, many people may not want the stock and may want to sell it. In this case, even though the company is doing well at this moment, it might not do as well in the future. This makes people want to sell and the stock price go down.

Conversly, if a new technology is on the horizon, a brand new company may be making very little money right now today but the future looks very bright. At some future time this company may make a ton of money and so people want to invest in stock today in anticipation of what might happen tomorrow.

This is one of the most important concepts of the stock market for beginners to understand. There is no set price or guideline for a stock's price. Stock market investing and the price of a stock is solely determined by what people perceive the value to be.