- How do the markets work?
- Why do the prices bounce around so much?
- Is it all random?
These are some of the questions I get asked most often…especially when markets are volatile. So, let’s dive into it…
Stocks are pieces of a company. And companies typically become more valuable as they grow. One of the most common ways of valuing companies relates to the size of their sales, their earnings or the cash they generate. That’s true for just about any business, the mom-and-pop down the street or one listed in the S&P 500. Many investors then try to anticipate which companies or which industries will do better at any given time.
You may be familiar with how this plays out in real estate. A family or an investor looking to buy a house in an up-and-coming neighborhood wants to get in before they miss the earliest opportunity and may face substantially higher prices. This can be similar to the stock market.
The main difference with these publicly traded companies is that you have an enormous amount of buyers and sellers all participating at the same time, so the sheer number of transactions can speed up this process significantly which can allow for more rapid price movements. Imagine if each house in a neighborhood had thousands of transactions each day. You’d see similar price movements play out.
Here’s the key point to remember—over time, prices typically reflect how a company is performing. The more money a company makes, the more it should be worth. That’s usually true whether you invest in a publicly traded company or a private business.
If you want better understanding of the markets, reach out. Our team would love to provide more clarity.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Investing involves risk including loss of principal. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.