| How are Stock Prices Set Each Day? | | | | As you develop you investing skills, you will learn |
| How much does a share of stock cost? | | | | strategies and techniques to help you establish a |
| That’s like asking how long is a piece | | | | fair price for stocks and either get that price or |
| of string. The answer is ‘it | | | | find another stock to buy that meets you |
| depends.’ | | | | investing criteria. |
| Once a stock moves out of the IPO stage and | | | | Buy low and sell high is the ultimate guide to |
| into the open market, there are a number of | | | | successful stock investing. It is also the reverse |
| factors that go into setting the price. | | | | of what many investors do. |
| Opening Price | | | | It’s not that investors start out to do |
| For example, Amalgamated Kumquats closes on | | | | that, but too often, they use price, and in |
| Tuesday at 251; what will it open at on | | | | particular price movement, as their only signal to |
| Wednesday morning? The answer is: who knows. | | | | buy or sell. |
| Most likely, it will open somewhere around 251, | | | | Stocks that have gone up recently, especially |
| but any number of things might cause it to open | | | | those with a lot of press, often attract even |
| higher or lower. Before the market opens on | | | | more buyers. This obviously drives the price up |
| Wednesday: | | | | even higher. |
| Civil war in Elbonia, the prime producer of | | | | People get excited about what they read and see |
| Kumquats | | | | and want a part of the action. They jump into a |
| President of Amalgamated Kumquats arrested for | | | | stock that is already trading at a premium |
| looting the company | | | | – they buy high. |
| FDA says Kumquats cure baldness | | | | Traders |
| Huge oil reserves discovered on Amalgamated | | | | Experienced traders can make money jumping in |
| property | | | | and out of a stock that’s caught the |
| All of these circumstances and many others could | | | | public’s attention, but it’s not |
| influence the price up or down. | | | | a game for the inexperienced and it’s |
| In the end, it remains a question of what a buyer | | | | not investing. |
| is willing to pay and a seller is willing to take. | | | | There’s risk involved and tax |
| The swirl of market, political, and industry news | | | | consequences along with other issues that mean |
| influences whether there are more buyers or | | | | most investors should leave this activity to |
| sellers for a particular stock in the market at any | | | | short-term traders. |
| one time. | | | | For most investors, trying to grab a piece of the |
| Clean Slate | | | | latest flashy stock, usually means paying too |
| Every day the market opens, it’s a | | | | much (buying high). |
| clean slate. Investors must meet no set prices. | | | | Bad Decision |
| Stocks that the day before were flying high may | | | | The other side of the market is when a stock |
| not get off the ground today. The ugly duckling | | | | has fallen; most investors may want to sell along |
| turns into a cash cow (how’s that for | | | | with the rest of the market. If you go by price |
| mixing metaphors). | | | | alone, this can be a bad decision (sell low). |
| The point is a share of stock is worth what | | | | There are many reasons a stock’s |
| someone else is willing to pay for it. That is the | | | | price drops and some of them have nothing to do |
| heart of investing. A stock may be a good buy at | | | | with the soundness of the investment. |
| $35 per share and a terrible buy at $50 per share | | | | That’s why if you only follow price you |
| to one investor, however another investor may | | | | may miss an opportunity. |
| not think twice about paying $50 per share. Which | | | | After a stock’s price has fallen can be |
| is the right price? Often only time will tell. Many | | | | a great time to buy (buy low) if you have done |
| years ago, some investors thought $10 per share | | | | your research on the company. |
| was too much for Microsoft and refused to buy | | | | Conclusion |
| it. Too bad for them. | | | | If all you know about a stock is the price, you |
| Fair Price | | | | may (and likely will) make investing mistakes. |
| Successful investors decide what a fair price for a | | | | Remember, if a stock has had a good run up it |
| particular stock is and that’s where | | | | may be time to sell, not buy (sell high). Similarly, if |
| they buy. They don’t let market | | | | a stock has dropped like a rock, it may be a good |
| hysteria goad them into overpaying. Likewise, if | | | | time to buy rather than sell (buy low). You |
| nothing has fundamentally changed with the | | | | won’t know what to do unless you |
| company, but the stock is dropping along with the | | | | understand a lot more about the company than |
| market, successful investors will sit tight and not | | | | its stock price. |
| be frightened off a good price. | | | | |