Educate me: The Stock market

Greetings fellow ATSers.

I am not at least ashamed to admit to not understanding something and genuinely believe that if more people learned to express that, the world would be a nicer place.
That said, I would like you to help set me straight regarding my, no doubt, flawed understanding of Economy, namely the stock markets. This is where I currently stand:
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A company desiring to sell a part of it issues a number of shares, or stocks, which are then sold on the open market – the stock market. The nominal value of the shares is determined by the amount of the company being sold, but upon entering the market their value becomes based on the supply and demand principle. So technically, a very successful company’s stocks can be grossly undervalued simply because there is no demand for them? Therefore, that company’s value is not directly determined by the demand of their goods and / or services but rather demand for the paper denoting a minute percentage of ownership of the named company? I realize common logic dictates that one and the other go hand in hand, but doesn’t this allow for a lot more fraud?

An example of what I mean: A newspaper owner had heard that a company producing cables has had a very successful year, despite the recession and would like to get his hands on some of the action. What’s stopping that person from printing a couple a stories, from sources who wish to remain nameless no doubt, that the company in question is soon to face an environmental lawsuit. Or that it’s been rumored that a car manufacturer was forced to recall an entire line of cars due to their cables being poorly made. As a result the company shares would lose in value as there would be more supply than demand, as people would start selling in fear of loosing on their invested value. The newspaper owner just managed to get what he wanted at half the price, ensuring profit once the news got out that the company had a great year.

So rather than reality, the stock market is based, on the perception of reality, which is in this day and age so easily manipulated a ten-year-old with an email account could do it.

Additionally, all those mainstream media titles saying “Stock market slips on fear of recession” are just proof that Economy has moved from the field of an exact science into the field of theology and religion. I mean isn't that just like sayinf “gravity pulled everything down today on fears it being an attracting force”

Barring the above is completely and utterly wrong, why do people follow the stock market with such horror? I mean, I understand if you invested a lot of money in it and you’re worried sick about it (like your 401k), but otherwise, why should anyone be scared of an easily manipulated number at the end of the day?

Sincerely, M.

reply to post by Manawydan

I truly dont think you need to be educated

YOU hit the nail on the head lol

The Official "up-to-the-minute Market Data" thread
www.abovetopsecret.com...

Here's a thread I post on/follow to keep up/learn...

Well first of all if someone is writing stories about stocks and or companies they themselves have to disclose if they own the shares or not. Not sure if they have to disclose whether or not they plan to buy them, but I'm sure that is highly illegal and blatantly obvious as you have a paper trail with the news story.

When a private company decides to get on the stock market, they strike a deal with an investment bank about what price per share would be a good price, how many shares they should issue, and how much money that would bring the company overall. Then when they have their (IPO) Initial public offering the shares are sold to anyone willing to buy them on the market. Usually the shares are bought pre-ipo through brokers who have some interest with special clients. Once the shares are out on the market the company can either do 2 things.

1) They can offer and sell more shares of stock, at the current market price to raise more money. When they do this, the stock price drops.
Say you have 1000 shares that are $10 each, you need to raise $5000 for your company so you issue 500 shares and sell them for $10 well overall the price will fall to $6.67 because there is more supply. Thats just a very simple crude example.

If the companies stock price becomes too cheap, another company can buy them out. So some larger company can come in and buy up all the shares on the open market, and say I'm your new owners. Then fire all the management and ceo because the new companies executives will take over. So the management has incentives to keep the price artificially up if needed.

2) They can buy back the shares using the money they generate through profits. This will decrease supply thus raising the stock price, making it difficult to be taken over by another company, and also make your investors happy.

The market fluctuations are purely psychological and news based. During these times in a bear market you can find great deals for companies that have not been hit that bad with the recession but who's stock prices have plummeted due to fear and panic.

Hope that explains it somewhat.

Cheers.

Not a bad analysis, but not correct either.

The stock market itself is a forward indicator of the economy. So it goes down before the economy does, bottoms before the economy, and starts recovering before the economy. Hence why it is important to look at even if you aren't invested. The market is forward looking. In essence, in a market such as this one, stocks aren't being valued at the business they are doing right now, but the perception of what they will do in the future.

Most of the time, you see big price movements when companies come out with their earnings reports. These usually will state the numbers for their most recent qtr and give an earnings forecast going forward. So a company can perform well in this economy, but their look forward could be cautious.

Also, another factor is whatever economic sector a stock is in. A saying goes that '95% of a stocks price movement comes from it's sector.' In other words, even if the company is great it can get beat up due to the rest of the companies in its sector being crappy. Its like having the nicest house in a crappy neighborhood. Instances like this are what allow people to buy what they feel are undervalued companies. This is what value investing is..... investing in companies that you feel the market has not appropriately valued at the time.

I guess what I would tell you, is that the stock market is a real time barometer of economic sentiment. If business and big money people feel the economy is finally bottoming you'll see the market start to solidify and head back up. What you are seeing right now is a massive decline in optimistic sentiment regarding global business and economics. So keep in mind, whatever the market is doing its looking forward...