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Making Money in the Stock Market

At any given time, a stock is worth no more or less than what people are willing to pay for it. When more people want to own a particular stock, the price rises and the shareholder makes money. When more people want to sell a particular stock than want to buy it, the price declines and the shareholder loses money. The big question is what makes people want to buy certain stocks and sell others?

One of the primary reasons for stock price movement is a company's earnings or profits. Companies that offer their shares for purchase to the public are required to report their earnings each quarter. If the company reports better than expected earnings, the stock price will most likely rise and if the company reports poor earnings, the stock price will most likely fall. That being said, the theory is that the price movement of a stock indicates what investors feel a company is worth.

Earnings are not the only factor that causes a stock price to move. Stock price also reflects how investors expect the company to perform in the future. During the dot-com bubble, for example, dozens of Internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. People purchased these stocks not based on how they performed in the past, but on how they expected the company to perform in the future. However, these valuations did not hold, and most all Internet companies saw their values shrink to a fraction of their highs.

So, while there is no clear cut answer on why stock prices move, the only thing we know for sure is that stocks are volatile and can change in price extremely rapidly.


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