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usually traded on a stock exchange or in an
electronic stock market. Sometimes the
stock that initially sold for $10 will rise in
price and sometimes it will fall like a rock.
It all depends on what people in the stock
market think the company that initially
issued the stock will do in the future. 434 Chapter 16 Stocks and Bonds If they think the company is destined for
big earnings, the stock will likely rise in
price. If they think the company is destined
for losses, or only marginal earnings, the
stock will likely fall in price. In a way, you
can think of trading stock in much the same
way you think about trading baseball cards,
or paintings, or anything else. The price
depends on the forces of supply and
demand. If demand rises, and supply is constant, then the price of the stock will rise. If
demand falls, and supply is constant, then
the price of the stock will fall.
Sometimes people buy certain stocks
because they hear that other people are buying the stock and because they think that the
stock is “hot.” In other words, it is popular
and everyone wants it. In the 1990s, some of
the Internet stocks fit this description.
Stocks such as Yahoo!, Amazon.com, and
eBay were bought because people thought
the Internet was the wave of the future and
almost anything connected with the Internet
was destined for great profit.
More often, though, people buy a particular stock if they think that the earnings of
the company that initially issued the stock
are likely to rise. After all, remember that a
share of stock represents ownership in a
company. The more profitable that company
is expected to be, the more likely people are
going to want to own that company, and
therefore the greater the demand for the
stock of that company.
Suppose William Welch
started a company in 1895. Through the
years, the company was passed down to family members. In 2005, the family members
running the company want to expand it to
two, three, or four times its current size.
Where might they get the money for this
expansion? One way...
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This document was uploaded on 01/16/2014.
- Winter '14