Who sets the price of stocks and baseball cards? You do! Actually, it is a complex combination of countless factors, but basically the prices are set as high as someone is willing to pay. The cards that are worth the most are from the best and most popular players. Likewise, the most expensive stocks are from the best performing companies.
The value of a stock or card is determined by the quality of the company or player. The price, however, is based on the value but may go up or down temporarily due to circumstances such as hype. If everyone gets excited about a particular company or player it will make that item extremely popular and the laws of supply and demand kick in. Since the demand increases dramatically and the supply remains the same the price will go up significantly. After the hype wears off, the price will usually return to a more reasonable level.
The number of items available also affects prices. If a company issues a Secondary IPO, where more shares hit the market, the value of the original shares will go down. Likewise, if more baseball cards for a particular player become available, the value of the cards will go down.
Wall Street got its start under a tree in New York City. Investors used to get together and trade stocks of their favorite companies. Eventually it became so popular that they had to move into a building and create a stock exchange. Of course it is much more complicated today, but the roots of stock trading are very similar to modern baseball card trading. Actually, there are special conventions and auctions where cards are traded every day. Maybe someday there will be the New York Baseball Card Exchange.
Why do companies issue stock? They do it do raise extra money for running their business. However, to do so they must give away some ownership to the shareholders. If the shareholder owns enough stock he or she will have some decision-making power with that company. Most people do not own that much stock, so that is usually not a factor. Once these shares are on the market they are endlessly traded back and forth at the going price. In a way, you can think of stocks as a company’s baseball cards.
Remember, keep it simple – stocks are like baseball cards. Look for the best players!
Nicholas Swezey is the creator of the website: howthemarketworksdotcom