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Wednesday, October 27, 2021

Column: Stocks 101

Beer, party, overslept, studying, finals, houseboats, Picnic Day (Picnic Day, Picnic Day), poor and starving. What do all of those words have in common, you might be wondering? Well, odds are if you go to Davis (which, seeing as you are currently holding the Davis paper in your hands, is a good bet), you’ve probably said them at one time. Today I’m going to talk about those last two.

I’m sure you’ve heard of the adage “a penny saved is a penny earned,” but ignoring the IRS for a moment (usually not the best idea), why can’t the reverse be true? Aside from getting a job, one great way to start earning extra money is to invest in the stock market.

With interest rates so low, the stock market is a great alternative for your hard-earned cash. However, very few students choose to invest in the market either because they don’t think about it or don’t know enough to make good decisions. The great thing about the stock market is that in any 10-year period the stock market has gone up, so being students, we have time to make long-term investments. If you are interested in learning but don’t know where to begin, I guarantee either a parent, professor or friend can help you out, but for now I’ll do my best. So without further ado, here is Stocks 101.

Today’s lesson: How exactly does the stock market work?  For that matter, what are stocks? Why do they exist? What determines the price of a stock? How come some companies are publicly traded and others are not?

The logistics of the stock market are actually pretty simple.  Stock owners decide what price they are willing to sell at, those who want to buy decide what price they are willing to buy at, and when those two numbers are in congruence a transaction occurs and the stock trades hands. But where exactly did the stock come from in the first place?

When a company needs to raise capital in order to invest or finance a new escapade, they have a number of options — some more complicated than others. The two most popular are borrowing money, a fairly well-known route, or selling stock. Stocks are referred to as equity because they are just that: a stake in the company. When one owns stock, even just a single share, one does in fact own a part of the company and can therefore attend shareholders meetings and voice one’s opinions (think Adam Sandler in Mr. Deeds).

All companies start out as private. However, the owners have the option to take the company public and have it publicly traded through a stock exchange such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation (NASDAQ). This is usually done either to expand or to raise capital. At this time, they can offer an Initial Public Offering, or IPO, for, say, $10 a share.

As soon as the stock goes public, the company is now partially owned by thousands of people all across the world. The first few days of trading are usually very active and volatile, but eventually the stock will settle at a price representative of what people are willing to pay for it. Within one day, that $10 share could either decrease by half, triple, or remain very close to where it started — it all depends on public perception of that company and what a share is worth. As time goes on, the price of a stock will either rise or fall, depending on a number of complicated factors that affect public perception of that company’s future.

The simplest answer to the question of what factors determine a stock’s price is the company’s current and future earnings. While the former is (usually) well known, the latter can be rather hard to predict and is determined by a combination of many factors. These elements can be nearly anything, from changes in the company, industry or world, to stock momentum, oil prices or the economy. There is no way to know or predict exactly what the price will be, but stock prices tend to follow the expectations of the company’s future.

If you do find a way, DANNY BRAWER would love for you to make him very rich by letting him know at dabrawer@ucdavis.edu.

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