So we’ve established what stock is and how a stock exchange works, but who determines the prices of the stocks themselves? Let’s go back to our original example with your clothing store in the mall that’s for sale, I Sell Clothes.
I really thought you would come up with something more creative!
You have 20 shareholders (aka owners) who each own 5% of your clothing store with individual shares worth $10,000 each. You with me? One of the owners decides he’s not interested in owning his share anymore and lists it on the stock exchange for sale.
He originally bought his share for $10,000 but what is it worth right now as he tries to sell it?
Think of it this way. Let’s say you bought the original iPod for $300 when it came out a few years ago. You haven’t used it in a while, and you decide to sell it on eBay. You would like to sell it for $300 (since that’s what you paid for it), but what are the chances of you getting $300 for it? Not good. Why? Various factors are involved but primarily supply and demand.
If there is a huge supply for something and hardly any demand, what happens to the value of the product? It goes down. If there is a small supply and a huge demand, what happens to the value? It goes up. This is why a few years ago when the Nintendo Wii first came out, there was a huge demand but a small supply. So you could buy it Wal-Mart for $300 and sell it on eBay for $500. The demand made the price go up.
Now let’s go back to our example. The share in your store was originally $10,000 but what is the supply and demand for it now? That can be influenced by a lot of different factors. If there’s only 20 shares out there, that’s a pretty small supply, so it would depend what the demand is doing. If your store is the hottest store in the mall and you sell out of all your clothes as soon as they hit the rack, there’s probably a lot of demand to be an owner with that store. Therefore, the price of that share would probably be worth more than the original $10,000 someone paid for it.
The price of stocks is determined by the overall supply and demand for that stock share. Relatively new companies like Amazon (AMZN), Google (GOOG), and Apple (AAPL) are very popular companies so there is a consistent demand for them. In addition, you have classic companies that do consistently well such as Wal-Mart (WMT), Coca-Cola (KO), and General Electric (GE). The abbreviation after each of these companies is called their ticker symbol or stock symbol. You’ve probably seen these symbols if you’ve ever browsed through the money section of your newspaper.
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