How is the Value of a Stock Determined?
The value of a stock is measured based on the company's current earnings and its future earnings expectations. The more the company's earnings grow, the more attractive the stock becomes, and its value increases over time. Stocks can be bought and sold through stock exchanges via brokerage firms.
What Drives a Stock's Price?
A stock's price is mainly influenced by the company's performance and investor confidence, but many external factors can play a role, such as economic changes or political events. Therefore, it is normal for a stock to experience daily fluctuations, rising and falling. If you sell a stock at a higher price than you bought it for, you make a profit, and if you sell a stock at a lower price than you bought it for, you make a loss.
A Tip from Warren Buffett
One of the most famous pieces of advice repeated by great investors like Warren Buffett is: hold your stocks for a long time, because long-term investment is often more profitable. Buffett once said: "Form a portfolio of companies whose earnings increase over time, and the value of your portfolio will rise with them."
Why Do People Buy Stocks?
Investors buy stocks for several reasons, such as achieving future profits, receiving cash dividends, or participating in company decisions through voting (if owning common shares). When an investor sees that a company has good growth potential, they buy its shares expecting the investment value to increase.
Your ownership percentage in the company is determined by the number of shares you own compared to the total shares available. So, if you own 100 shares out of 1000, you own 10% of the company.
Types of Stocks
There are two main types of stocks:
- Common Stocks: Grant their owner voting rights in shareholder meetings, as well as a share of the profits.
- Preferred Stocks: Typically do not grant voting rights, but they offer priority in dividend distributions and in the event of liquidation of company assets.
When Do Companies Issue Stocks?
Companies resort to issuing shares when they need financing, either for expansion or to launch new projects. These shares are offered on the market through what is known as an Initial Public Offering (IPO), and then become available to investors.
A company can also issue additional shares later to raise new funds, or repurchase a portion of its shares from the market, which may raise the price of the remaining shares and increase the company's market capitalization.
What is Market Capitalization?
Market Capitalization (also known as Market Cap) refers to the total value of the company in the market, calculated by multiplying the number of outstanding shares by the current share price. For example: if the share price is $100 and the number of shares is 1 million, the Market Cap = $100 million.
What Affects a Stock's Price?
A stock's price is affected by several factors, the most important of which are the company's earnings and future growth expectations, but these are not the only factors. There are also external and internal factors that can directly or indirectly affect the stock price, including:
Changes in Management Leadership: such as the resignation of the CEO or the appointment of a new figure, which may affect investor confidence.
- News and Events Related to the Company or Sector: such as sudden announcements of high profits, legal problems, or acquisition deals.
- General Economic Conditions: such as inflation rates, changes in interest rates, or economic slowdown, which are factors affecting investor risk appetite.
- Regulatory and Legislative Decisions: such as tax changes or new government laws, which may affect company profitability.
Ultimately, the most important factor is investor confidence. When fear prevails in the market, many start selling stocks, causing prices to fall. The exact opposite happens when there is optimism and confidence in the company's future.
Dinar: Your Partner in Strategic Investing
We empower you with awareness and knowledge. A stock is not just a security; it is a real share in a company. Owning a stock makes you a partner in the company, owning a share of its profits, and enjoying the opportunity to grow in parallel with its performance.
Understanding the nature of stocks is the first step towards successful investment. At Dinar, we believe that informed investment begins with understanding basic concepts and evolves with every thoughtful decision you make with confidence.
Through Dinar, you can access financial solutions that suit your needs. Contact us right now or download the Dinar app from the Apple Store and Google Play to discover investment options that align with your financial goals, and ambitions!
