How do Stock Prices Work?

By Robbin Carols

There are basically two main ways to profit from buying stocks. First, many corporations pay dividends to their shareholders. They may pay 50 cents per quarter for each share you own. This is not required of a corporation, so you may or may not be paid dividends.

Capital gains are another way to profit from stock purchases. You buy the stock at one price and at a future time, whether it's in an hour or in 20 years, you sell it for a higher price. After you take the difference, the amount you sold it for over the amount you paid is a capital gain.

When someone buys shares of stock, they do so in hopes of profiting through capital gains. High dividend paying stocks are often sought after by retirees who are looking for a stable source of income.

Stock prices have to increase if you want to make capital gains. Stock prices vary from day to day, so how do you know that it will go up? What makes stock prices change all the time?

The price of stocks goes up and down the same way that the price of anything else goes up and down. It is an economic principle of supply and demand. Maybe you remember that from your economic class.

It's all based on whether supply and/or demand go up or down and buy how much. An increase in supply will lower the price whereas an increase in demand will increase the price.

With stocks, if a lot of people want to buy a particular stock and not enough people are selling, they will have to raise the price to accommodate for it. If there are more people looking to sell than people willing to buy, they will need to decrease the price to get people to buy.

Understand supply and demand and you can understand what to look for in a stock. You want a higher price after you buy, so you want more people wanting to buy later on. - 23204

About the Author:

Do you ever ask, "how do stocks work?" Don't stay confused. Find out how stock prices change from day to day.