Let me start at the beginning. What is a stock and why does its price change?
Say you own a small company. Things are going well with your business, and you own 100% of the company. You decide to have an IPO (initial public offering) , take the company "public" and allow others to invest in your company. For this investment, you will/may have to give up some control of the company. Remember, you now own 100% of the company and can make any and all decisions yourself. I won't go into the details of finding a bank to run the IPO, creating a board of directors and a host of other things that have to be done to get to an IPO. So when you decide to sell stock in your company, the first thing you have to determine is the value of your company. Say you decide your company is worth $100,000 and you will sell 1,000 shares representing 40% of the value of the company (again, there are tons of calculations that are done to determine these numbers). You are agreeing to sell an interest valued at $40,000 ($100,000 x 40% = $40,000), so each share of stock is worth $40 ($40,000 / 1,000 shares = $40/share) Say a year later, you are doing great and it's determined that the company is now worth $200,000. The 40% owned by stockholders is now worth $80,000 ($200,000 x 40% = $80,000). Since there are still only 1,000 shares outstanding, they are now worth $80 each. ($80,000 / 1,000 shares = $80.00/share). The stock's value changes based on changes in the value of the company, or it's Market Capitalization ("Market Cap").
This is a very simplistic example. The real question is what is value? To me, an item's value is what you can get someone to pay you for it. Your house isn't worth X is you can't get someone to pay you X for it. The stock market is perfect in this example because it matches up buyers and sellers. When buyers are not willing to pay a certain amount for a stock, its price will drop, until it reaches a price where buyers are again willing to buy. When there are more buyers than sellers, the price will increase. Again, this is very simplistic. During the day lot things happen that impact the buyer/seller ratio of any particular stock, which results in price fluctuations. Value also came into play in the financial market implosion of 2009, but that's a story for another day.
What is "the stock market"?
The stock market is literally thousands of stocks, all moving in their own directions for their own reasons. When you hear that the market was up or down on a certain day, they are usually referring to either The Down Jones Industrial Average or any other number of indexes that are supposed to gauge the general direction of the market. The problem is that the market is too big for any index to truly tell what happened in the market. If you go back to the crash of October 1987, you could find 30 stocks that did not drop in value that day. Same thing for the tech bubble pop in 2000 and the train wreck of 2009 If your portfolio happened to contain those 30 stocks, and only those stocks, the "crash" didn't effect you. My point is that an index is only as good to you if the direction of the index mirrors the direction of your portfolio. Everyday.
Since this is a blog about investing, I guess at some point I have to talk about what I'm investing in. Here's what I own and the return as of today:
|Aetna Inc. Common Stock
|AMERIGROUP Corporation Common S
|American International Group, I
|American Express Company Common
|Bank of America Corporation Com
|Citigroup, Inc. Common Stock
|Capital One Financial Corporati
|Walt Disney Company (The) Commo
|Ford Motor Company Common Stock
|Genworth Financial Inc Common S
|Level 3 Communications, Inc.
|Mastercard Incorporated Common
|Procter & Gamble Company (The)
|Research In Motion Limited
|TJX Companies, Inc. (The) Commo
|Toyota Motor Corporation Common
|Xerox Corporation Common Stock
DISCLOSURE: I AM NOT MAKING ANY RECOMMENDATIONS OR ENDORSEMENTS OF ANY COMPANIES OR STOCKS. I AM NOT A CERTIFIED FINANCIAL PLANNER NOR IS MY INTENT TO ENTICE OR ENCOURAGE ANYONE TO DO ANYTHING WITH THEIR MONEY. THIS BLOG IS PURELY ENTERTAINMENT/EDUCATIONAL. DON'T ASK ME IF YOU SHOULD OR SHOULD NOT BUY ANY STOCKS BECAUSE WILL NOT GIVE YOU ANY ADVISE. I AM NOT SELLING ANY SERVICE OR PRODUCT, NOR AM I ENDORSING ANY SERVICE, PRODUCT, PERSON, PLACE OR THING.OTHER THAN MY INVESTMENTS IN THESE COMPANIES AND MAYBE OWNING SOME OF THEIR PRODUCTS, HAVE NO RELATIONSHIP REAL OR IMPLIED WITH ANY OF THEM. I BOUGHT THEIR STOCKS FOR MY OWN PERSONAL REASONS. AND I BOUGHT THEM THROUGH A SEPARATE LICENSED BROKER. IF YOU BUY ANY OF THESE STOCKS, YOU DO SO AT YOUR OWN PERIL. I WILL NOT ASSUME ANY LIABILITY BECAUSE YOU DO SOMETHING YOU DON'T UNDERSTAND, OR LOSE MONEY ON.
As you can imagine, I bought a lot of these stocks last year when the market cratered. Somebody famous said do what everyone else isn't, or something like that.