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Old 02-20-2011, 08:12 PM   Nav to Top  #1
goldfoejax
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Default What if everyone sells but is wrong/company profits?

I'm just learning how the market works. Suppose this, and please correct anything I may be wrong about:


I buy a bunch of shares at 10$ and after which, almost EVERYONE else that owns that stock decides to sell their shares to other people for less then $10 because they think the company is going down in profit but it actually goes up.
From what i've read, the shares everyone else sells become lower cost/value because there is a high supply of them and the sellers are desperate to not loose ALL of their money.

The stock I own would become less per share then i paid, so I can not profit by finding others to buy my shares for more than I paid because due to the high supply, shares are offered for less than I paid. So, then, my only way to profit would be to wait for the company to pay out the share holders(me) and HOPE that the value goes up from below $10 (because everyone that sold it at $10 F'd up) to above $10?!?

How often does the company 'pay-out' if it's that type of stock? Every quarter year, or are they all at different time periods?


Or is this idea of everyone selling and being wrong about the company's profit too much of a F-up to even happen because the 'people' selling/buying the stocks to the public would know better than to sell it for so low despite that there is such a high supply of it they want to get rid of?

thanks
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Old 02-21-2011, 07:36 PM   Nav to Top  #2
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all i'm really asking is if this scenario is possible:
soo many share holders of a stock i also own think the value is going to drop a lot, so they sell it for less than it's worth/i paid because the new buyers won't pay what's it's currently at because they also think the value might drop. So, then the shares I own become less valuse because of all the shares that are trying to be re-sold for less, right?
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Old 02-21-2011, 08:21 PM   Nav to Top  #3
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Although you're over complicating it a bit yes, that is the gist of it. Buy low sell high is usually your goal in long term stock investing.

Start here for the basics on how the stock markets work: http://biz.yahoo.com/edu/st/ir_st1.ir.html
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Old 02-22-2011, 12:10 AM   Nav to Top  #4
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Can you give a specific $10 example? There's a lot to learn, but it's not that overwhelming.


Just to be clear and so I also understand you, the company’s corporate profits are not the same as your profits in the stock position you hold. A stock’s price is not (always) the same as the company’s value. In fact, it’s rarely exactly the same.

You are correct – supply and demand (a lack or excess of either) affects the share price. If traders/investors change their perceptions of the worth/profitability and/or value of the company, they will buy or sell shares accordingly. If buyers and sellers don’t have equal balance, the share price readjusts. But, this doesn’t mean the underlying value of the company has changed (although it could have). Traders/investors always consider where the best opportunity for the least risk is. They may find something more attractive elsewhere based on any number of reasons:

Interest rates
Economic environment
Global events/sociopolitics
Market risk – too much of an advance over a period of time
Company-specific issues
Etc., etc., etc.


If you pay $10 but later on the market – the sum total of all buyers and sellers – doesn’t want to own it (for whatever reason), share prices will decline on selling imbalances. In that case, you are sitting on an unrealized loss. The actual “company” won’t buy your shares, but the market will – at the best available bid. It doesn’t matter what you do or think, the market has marked down the share price regardless what the company has done – good or bad – based, again, on expectations.

(An exception to this is if there is a corporate event, such as a takeover – a buyout price above $10 could get you your profit. Also, if a company is buying back their shares, as many of them are doing, they buy them back in the marketplace, not from you specifically.)

It’s possible that the company has disclosed improved results but the share price of the stock declines anyway. In that case, the good results weren’t enough to make the “market” keep their shares, so it sells off/declines. It happens all the time. You’re then faced with a choice: 1) believe that the market is wrong, hold on and maybe even buy more (though that wouldn’t be my first recommendation), 2) believe that the market is right, sell and take your lumps/loss, or 3) ignore the price action/do nothing.


“How often does the company 'pay-out' if it's that type of stock? Every quarter year, or are they all at different time periods?”

Companies may pay a dividend (a distribution of excess cash-flow/earnings/profits). These are usually paid out quarterly. In the event of a dividend, the share price is reduced by the same amount. Sometimes there are special one-time dividends, as well. The share price is adjusted.


This question confuses me…

“Or is this idea of everyone selling and being wrong about the company's profit too much of a F-up to even happen because the 'people' selling/buying the stocks to the public would know better than to sell it for so low despite that there is such a high supply of it they want to get rid of?”

…but I’ll take a shot.

“Or is this idea of everyone selling and being wrong about the company's profit too much of a F-up to even happen”


This happens all the time. There are two classes of market participants:

1) the “smart money”, specialists, floor traders, market makers, the “operators,” etc., and

2) the rest of us.

Most of “the rest of us” do just like the rest of us… buy high, sell low (or something commonly along those lines). The ones doing the selling into a decline are literal losers. The problem is in not knowing exactly where the bottom is and if we have the courage and dollars to stay with it. Few of us pay attention to the smart money. Again, it comes down to supply/demand – at what price the really serious money is interested.

I think in referring to 'the people' selling/buying the stocks to the public there is some confusion. These are the smart money, but they are also an important part of the market. They are not the company. They provide for an orderly, liquid market (as much as possible, anyway). They are the ones who will “know better” when to sell (or buy). They are also the ones who buy low and sell high. They have to. Otherwise, there is no “orderly market”. They want the most opportunity and the least risk. I don't blame them, I do too.


It’s better to be a follower of the smart money than a member of “the rest of us”. The trick is being able to see the difference. If I were you, I think I’d forget any information about companies and their profits for a while. Focus on stocks.
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Old 02-22-2011, 12:25 AM   Nav to Top  #5
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Originally Posted by goldfoejax View Post
all i'm really asking is if this scenario is possible:
soo many share holders of a stock i also own think the value is going to drop a lot, so they sell it for less than it's worth/i paid because the new buyers won't pay what's it's currently at because they also think the value might drop. So, then the shares I own become less valuse because of all the shares that are trying to be re-sold for less, right?

Yes, it's possible. Keep in mind that they may be selling it for less than only you think/felt it is/was worth. Would you pay more now if you suspected you may be able to pay less later on? You'd wait until the reward better suited the risk, right?

Excess selling pressure drives prices down. Prices will fall until a new balance is found.
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