Basics of the basics: stocks (part two)
So, in the previous topic we discussed what stocks are, why they are needed and where they come from. If you have not read it and do not feel completely familiar with these questions, it may be worth reading. In the meantime, we smoothly move on to what happens with these shares after an IPO.
The author's comment: as in the previous topics, I do not set out to embrace the immense, and I will try only to explain some basic things on my fingers. If you think that the information is incomplete or not accurate - I highly welcome the detailed comments (which I will try to incorporate into the text of the article) - or, even better, independent topics. And also - many thanks to all those who read, commented, clarified, asked questions - I am pleased to see that people are interested. I was pleased to receive your comments, and I will try to answer all your questions.
How shares are traded
Most of the shares are sold on exchanges one way or another (the alternative is over-the-counter transactions, the so-called over-the-counter ). Exchange (in fact, there are different exchanges, but here we will focus on stock exchanges - stock exchange ) - this is, in the simplest sense, a place where buyers and sellers meet and agree on a price. Some exchanges are very similar to what you saw in Hollywood films - people stand on the sales floor and shout “I sell ...! I buy !! ”- until recently (the beginning of 2007), the NYSE was the famous New York Stock Exchange .
')
Another part of the exchanges simply does not exist in the physical world - they are entirely electronic, such is the NASDAQ exchange : all operations on it go through the network to which the exchange's clients are connected. One way or another, the principle of operation of most stock exchanges is an auction - the price for which shares are sold is defined as the aggregate of the maximum price that the buyer is willing to pay for a given amount of a given flow, and the minimum price for which the seller is willing to sell it. Consider a small example.
Suppose there are 4 sellers who wish to sell XYZ shares for $ 10.05, $ 10.09, $ 10.12 and $ 10.13. At the same time, there are 4 buyers who want to buy XYZ shares at prices of $ 10.00, $ 10.02, $ 10.03 and $ 10.06 (for simplicity, we assume that they want to buy and sell the same volume). In this case, the conditions of the bid (purchase request) and offer (offer to sell) at a price of $ 10.06 will be satisfied and orders will be fulfilled; The price of XYZ stock is set at the price of the last trade, that is, $ 10.06. All other orders will continue to wait (until similar conditions are met). Naturally, if a situation arises that the offer is less than a bid, the order will also be executed at the offer price.
Now all these auctions are usually performed electronically, and it may take less than a second from the process of placing an order to its completion (exact data, however, depends on the specific exchange). It is important to note that all described, as a rule, refers to the secondary stock market. The situation in the primary market is somewhat different - there is only one seller (as a rule, an intermediary company, an “underwriter”) and many buyers; the seller changes the price according to demand. Strictly speaking, this is one of the reasons why stock prices change.
Why does the price of shares change?
There are several reasons for this. Actually, one is already obvious - a change in supply and demand leads to a change in the value of shares. For example, if there is a constant demand for XYZ shares, it would be logical to assume that sellers will raise an offer, believing that if they are needed by so many, they will be bought at a higher price; and vice versa, when panic begins and everyone wants to sell stocks, in the absence of bids for a given price, sellers begin to lower the offer, thereby lowering the current share price. But this is more a consequence than a cause. In reality, the movement of stock value is an indicator of how well the company "feels" itself. And this “feeling”, in turn, is already made up of such factors as:
Ultimately, the “feeling” of potential buyers and current shareholders is changing about what will happen to the company and whether it will be a good investment for its shares. As a result, after understanding all this information, they make a decision on the sale or purchase. And here - demand, supply - see the beginning of the section.
Actually, I was not going to talk about indicators right here, but I was asked a number of questions, the essence of which was that it was very difficult and incomprehensible. In fact, this is simple and understandable, therefore, using an example we will try to consider one of these indicators.
There are a large number of indicators that can be used to assess the validity of the current value of companies. For those interested, I ’ll refer you to Wikipedia , but here, for example, consider the P / E Ratio already mentioned in one of the previous topics - the ratio of stock to earnings of a company. This is the simplest indicator: to calculate it, simply divide the current value of the company's shares by the company's specific income per share (that is, PE = SharePrice * TotalNumberOfShares / Earnings). If the P / E for a particular company is very different from the average P / E value for the industry, then the company's shares are undervalued or overvalued. As an illustration of the last item, you can see the following picture:
It is easy to see that DELL’s lowest P / E value is partly due to the fact that the company gave its earnings results significantly higher than expected in the third quarter, which even spurred stock markets for a while. At the same time, Amazon’s situation is somewhat worse - which is not strange, given the general decline in online trading.
Thus, even comparing the P / E values ​​to each other, it can be concluded that company A has a whole better situation than company B (however, it should be recalled that the further companies are from each other in terms of activities, the less to believe in such a comparison, and besides, this is just a technical indicator - he doesn’t say, the company's shares will go up or down, but merely provides information for reflection; in itself, he doesn’t say anything at all).
From all of the above, it follows that the price of a company's stock, as well as the nature of their change, is determined by the mass of various parameters, and as a whole is of unpredictable nature (in fact, it is these kinds of predictions that financial analysts are engaged in; you can guess how often they guess on the complexity of this task). The value of shares of many companies, appropriately aggregated and processed, and in particular - changes in these values, allow us to judge not how a particular company feels, but how the market feels and leads itself. We will talk about this in the next topic, but for now - I am waiting for your comments.
Sources: As already correctly noted in the comments, the article is based on the translation of the tutorial from the website investopedia.com , finished off with information from Wikipedia - I don’t hide it, and moreover, I recommend the last site in every possible way to read: sillier than me, and surely better versed in the subject. My task is to popularize and explain everything that I can in human (and Russian) language. If someone is interested in the topic and begins to study the subject of the article in detail - I will assume that my task is completed for five with a plus.
Update: Thanks, announcements and promises - take a look, if you are wondering what this blog will talk about in two or three days.
The author's comment: as in the previous topics, I do not set out to embrace the immense, and I will try only to explain some basic things on my fingers. If you think that the information is incomplete or not accurate - I highly welcome the detailed comments (which I will try to incorporate into the text of the article) - or, even better, independent topics. And also - many thanks to all those who read, commented, clarified, asked questions - I am pleased to see that people are interested. I was pleased to receive your comments, and I will try to answer all your questions.
How shares are traded
Most of the shares are sold on exchanges one way or another (the alternative is over-the-counter transactions, the so-called over-the-counter ). Exchange (in fact, there are different exchanges, but here we will focus on stock exchanges - stock exchange ) - this is, in the simplest sense, a place where buyers and sellers meet and agree on a price. Some exchanges are very similar to what you saw in Hollywood films - people stand on the sales floor and shout “I sell ...! I buy !! ”- until recently (the beginning of 2007), the NYSE was the famous New York Stock Exchange .
')
Another part of the exchanges simply does not exist in the physical world - they are entirely electronic, such is the NASDAQ exchange : all operations on it go through the network to which the exchange's clients are connected. One way or another, the principle of operation of most stock exchanges is an auction - the price for which shares are sold is defined as the aggregate of the maximum price that the buyer is willing to pay for a given amount of a given flow, and the minimum price for which the seller is willing to sell it. Consider a small example.
Suppose there are 4 sellers who wish to sell XYZ shares for $ 10.05, $ 10.09, $ 10.12 and $ 10.13. At the same time, there are 4 buyers who want to buy XYZ shares at prices of $ 10.00, $ 10.02, $ 10.03 and $ 10.06 (for simplicity, we assume that they want to buy and sell the same volume). In this case, the conditions of the bid (purchase request) and offer (offer to sell) at a price of $ 10.06 will be satisfied and orders will be fulfilled; The price of XYZ stock is set at the price of the last trade, that is, $ 10.06. All other orders will continue to wait (until similar conditions are met). Naturally, if a situation arises that the offer is less than a bid, the order will also be executed at the offer price.
Now all these auctions are usually performed electronically, and it may take less than a second from the process of placing an order to its completion (exact data, however, depends on the specific exchange). It is important to note that all described, as a rule, refers to the secondary stock market. The situation in the primary market is somewhat different - there is only one seller (as a rule, an intermediary company, an “underwriter”) and many buyers; the seller changes the price according to demand. Strictly speaking, this is one of the reasons why stock prices change.
Why does the price of shares change?
There are several reasons for this. Actually, one is already obvious - a change in supply and demand leads to a change in the value of shares. For example, if there is a constant demand for XYZ shares, it would be logical to assume that sellers will raise an offer, believing that if they are needed by so many, they will be bought at a higher price; and vice versa, when panic begins and everyone wants to sell stocks, in the absence of bids for a given price, sellers begin to lower the offer, thereby lowering the current share price. But this is more a consequence than a cause. In reality, the movement of stock value is an indicator of how well the company "feels" itself. And this “feeling”, in turn, is already made up of such factors as:
- Company earnings (earnings). A company that does not make a profit is unlikely to last for long (although it is possible, and moreover, there are often situations where in the short term the company does not make a profit and even suffers losses). Public companies (public companies - those that are traded on exchanges) are required to publish detailed reports on their incomes at least four times a year (in other words, once a quarter). Analysts are trying to predict the company's earnings based on its previous earnings, market conditions, the company's actions during the reporting period; if the results of the company are higher than predicted, then the value of the shares rises, and vice versa, decreases if the company brings less income than expected or incurs losses.
- Market condition. Sometimes the company generates income even more than planned, but the shares still go down. With what it can be connected? An example could be a sharp drop in the Russian market in the context of the current crisis - foreign investors, being in a situation of a sharp liquidity crisis, began to feverishly sell shares of Russian companies, which led to a sharp drop in their value (although initially many of these companies were not directly affected by the crisis) . Similarly, a change in the price of oil can lead to a change in the value of shares of companies producing and consuming oil products (such as, say, Lukoil and British Airways).
- ... in fact, these indicators are much more, but these two are often the decisive ones. For those who are interested in digging into details, I highly recommend studying the site investopedia.com - there is a lot of this information.
Ultimately, the “feeling” of potential buyers and current shareholders is changing about what will happen to the company and whether it will be a good investment for its shares. As a result, after understanding all this information, they make a decision on the sale or purchase. And here - demand, supply - see the beginning of the section.
Indicators
Actually, I was not going to talk about indicators right here, but I was asked a number of questions, the essence of which was that it was very difficult and incomprehensible. In fact, this is simple and understandable, therefore, using an example we will try to consider one of these indicators.
There are a large number of indicators that can be used to assess the validity of the current value of companies. For those interested, I ’ll refer you to Wikipedia , but here, for example, consider the P / E Ratio already mentioned in one of the previous topics - the ratio of stock to earnings of a company. This is the simplest indicator: to calculate it, simply divide the current value of the company's shares by the company's specific income per share (that is, PE = SharePrice * TotalNumberOfShares / Earnings). If the P / E for a particular company is very different from the average P / E value for the industry, then the company's shares are undervalued or overvalued. As an illustration of the last item, you can see the following picture:
It is easy to see that DELL’s lowest P / E value is partly due to the fact that the company gave its earnings results significantly higher than expected in the third quarter, which even spurred stock markets for a while. At the same time, Amazon’s situation is somewhat worse - which is not strange, given the general decline in online trading.
Thus, even comparing the P / E values ​​to each other, it can be concluded that company A has a whole better situation than company B (however, it should be recalled that the further companies are from each other in terms of activities, the less to believe in such a comparison, and besides, this is just a technical indicator - he doesn’t say, the company's shares will go up or down, but merely provides information for reflection; in itself, he doesn’t say anything at all).
From all of the above, it follows that the price of a company's stock, as well as the nature of their change, is determined by the mass of various parameters, and as a whole is of unpredictable nature (in fact, it is these kinds of predictions that financial analysts are engaged in; you can guess how often they guess on the complexity of this task). The value of shares of many companies, appropriately aggregated and processed, and in particular - changes in these values, allow us to judge not how a particular company feels, but how the market feels and leads itself. We will talk about this in the next topic, but for now - I am waiting for your comments.
Sources: As already correctly noted in the comments, the article is based on the translation of the tutorial from the website investopedia.com , finished off with information from Wikipedia - I don’t hide it, and moreover, I recommend the last site in every possible way to read: sillier than me, and surely better versed in the subject. My task is to popularize and explain everything that I can in human (and Russian) language. If someone is interested in the topic and begins to study the subject of the article in detail - I will assume that my task is completed for five with a plus.
Update: Thanks, announcements and promises - take a look, if you are wondering what this blog will talk about in two or three days.
Source: https://habr.com/ru/post/43428/
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