I was surprised to find that most people think there’s some relationship between a company’s stock price and the operations of that company. Amazing!
When a company issues shares through a brokerage firm they receive cash in exchange for a piece of that company. Once the shares hit the market, all the trading of that stock takes place between unrelated third parties.
The stock market is referred to as a secondary market. Once the shares hit the “market”, from that point on, it really is a zero sum game. Every trade has two sides – a buyer and a seller. Both sides can’t win. When someone wants to sell, someone else has to want to buy. One person will win and one person will lose.
With so many more investors buying and selling shares today, there really isn’t the same game as there was 50 years ago when almost all the buying and selling took place between professional money mangers. Today, someone sitting at their computer in Bay Bulls, Newfoundland can execute a trade on any listed stock and for the split second set the price of all the outstanding shares of the Royal Bank of Canada. It has nothing to do with the Royal bank or its ability to earn money.
Stock prices today are primarily set based on emotion, not science. What people believe a stock is worth determines whether people buy it or sell it.
Whenever you’re looking at the price of a stock, try to remember what you’ve bought, a little piece of that company not just a piece of paper.