Very Basic Theory - the concept of second hand shares

[dirkdiggler444]

Hi all, I have completed some research already but cannot find a really explanatory answer, so thought I would ask the expert net traders here.

My question is this:
When buying shares in a company, what exactly are you getting for your money? I know about -

1. opportunity to go to the annual meetings
2. dividends
3. capital growth
but let me summarise it like the following.....

1. Annual Meetings - not interested, I'm sure the bigwigs can run the company just fine without my input

2. Dividends - appantly you only get a few% return via dividends, I'm sure this changes depending on the share, but thats what I've found so far.

3. Capital Growth - this is the reason I am so confused.....

It appears that the current share prices do not reflect the value of a company. There are many companies out there that are reporting huge profits, but their share prices are plumetting. I understand there are incentives for the companies to keep their share prices high (I imagine because the big wigs have shares themselves) but I also imagine that the share price has little impact on the day to day operations of a company and do not affect the companies bottom line (profit). So why would a company care if their share price drops, they already have their money from the shares from the initial float, and are making money through their normal operations.

The company is growing, but the share price (my slice of capital growth) is going backwards. How can I access some of the profit my company is making?

I read an analogy about buying a new car. when you buy the new car, your cash goes to the manufacturer, similar to how they make their money from the initial float, and after that, the car can be traded, much like shares. However the problem with this analogy is that if buying a second hand car, at least I have something real, something I can use. If I buy a share, and the share price is bugger all, and doesn't look like it will go up, dividends are less than the return I can get from a bank, what is the point?

Why would someone want to buy shares??
What makes people start buying shares and making the share price rise again???
What will drive people (buyers/the company) to want to lift the share prices back up to reflect company value????
What else besides people buying shares can lift the price?????

I know I've probably touched on several issues here, but if someone could give some easy to understand answers that will give me a warm fuzzy feeling about the share market, that would be great.
Thanks

 

[2BAD4U]

Where to start??? You are basically asking how the market works which entire books are dedicated to. Infact you are asking about economics 101, but let's see if I can put it simply.

Companies do not determine the share price, the market does (supply and demand), if there are more sellers than buyers - price will fall. In the current economic situation investors are moving their money to safer (?) options such as cash and there is a herd mentality at the moment.

Companies do care if their price falls too far, because if it falls far enough they can then become a takeover target.

People are buying shares now because they see some companies as being undervalued and expect growth in the share price in the long term as the economy turns.

Hope this helps, but you really need to look for some books (websites) on the subject.

Cheers

 

[Tysonboss1]

Why would someone want to buy shares??
What makes people start buying shares and making the share price rise again???
What will drive people (buyers/the company) to want to lift the share prices back up to reflect company value????
What else besides people buying shares can lift the price?????

I know I've probably touched on several issues here, but if someone could give some easy to understand answers that will give me a warm fuzzy feeling about the share market, that would be great.
Thanks

I suggest you read some books about investing before you buy into the market, a good one for beginners is "How the stock market really works by martin roth"

As was said above a share price will go down when more people are selling than are buying, and will go up when more people are trying to buy in than trying to sell.

It's like anything if you flood the market with banannas then banannas drop in value, no matter how fresh and tasty they are,... if you stop slow the supply of banannas, but heaps of people want to buy them, then they go to the highest bidder and the price will rise.

If enough people believe that the world economy is slowing and companies will have trouble maintaining profits and they start selling then the price will drop, until the price gets to a point that people think is fair value and start buying back in,.... once the herd of people start to have fair in the economy again they will return and start buying shares again and the price should rise.

 

[Wysiwyg]

The company is growing, but the share price (my slice of capital growth) is going backwards. How can I access some of the profit my company is making?

One of my downfalls was (and still suffering) buying stock on company fundamentals.Obviously so far this year has not been the right time for investing in company shares based on fundamentals, in search of price appreciation.


p.s. you know what an expert is don`t you? :hide: