Why Stock Prices Rise and Fall

There are many reasons that lead to the rise and fall in individual stocks and the stock market in general, but the major reasons are pretty easy to understand. The value of an individual stock, like anything you would buy at the grocery store, is based on what people are willing to pay for it. When the grocery store charges Rs.64 for broccoli, it sits on the shelves until it withers and rots because nobody wants to pay that much for their green vegetables: when the price is set at Rs.42, people start to buy it again, because it's a reasonable cost. Remember: stocks started out sold on street corners and corner stores, just like broccoli: if people believe that a portion of a company is worth, they will ask to buy it.

There are lots of things that can affect the public's perception of a corporation, and one of the things that stock traders and scammers rely on is the idea of the "inside tip". When people hear that a certain company is going to undergo a major gain or loss in fortune, especially when they believe that not everyone knows about the change, they react by wanting to get in on a good thing, or get out before everyone else does. But that doesn't stop people from thinking longingly of the chance that one lucky day, they will get drunk with a high-powered corporate executive who will unloose a top-secret plan for a hostile takeover of Pepsi by Coke in just enough time for them to buy a thousand shares of Coca-Cola and get filthy, stinking rich. We are, after all, only human.

You don't have to have an inside tip to make decisions about buying or selling stocks based on what you've read in the newspapers, but in general, people make money off the stock market by buying nice, safe, conservative stocks and holding onto them like grim death for years and years. If you buy shares in diverse, long-lived companies that have done all right and earned lots of money over the last ten or twenty years, your money will probably grow at a rate of around 10% a year. That's a ballpark figure, but over time, given the stock market's history, it's a pretty safe bet, and it's a lot better for growth than stuffing your money into a mattress or putting it into your bank's savings account, where you'll be lucky to get 3% interest.

People who make fortunes in the stock market, usually start out by investing a smaller fortune. Some people speculate on stocks, buying only when share prices have dropped and they believe the drop is temporary, or buying newer stocks at low pieces, in the belief that they will someday rise again. People who make their money speculating on the stock market do so because they think they may make more than they would in safer investments like bonds.