Hey,

I'm new to the stock market and am curious to know if the stock market only has money in circulation because of investors who have put money into them directly via buying shares or is there also an underlying cause in which stock prices will sky rocket? Let's say for example... if a mass amount of people start buying Apple's new thin laptop will Apple shares increase in value directly from the profit that Apple makes from selling this new thin laptop or is the price of a share strictly dependent on buyers and sellers buying/selling their shares?

thanks in advanced for helping me with this confusion.

- Sterling

Hi Sterling,

This is a good question that I think a lot of people do not understand so I will do my best to answer here.

What you are buying when you buy the stock of a company is ownership in that company. So what the value of a stock is ultimately based on is how much the public feels a company is worth, which is in turn based on:

1. How much money the company has made in the past

2. How much money the company is currently making.

3. How much money the company is expected to make in the future.

4. How much in assets the company has (things like office buildings computers etc)

5. How much in liabilities the company has (things like debt they have to pay off, outstanding lawsuits etc)

So with this in mind when one of the above things that goes into the calculation of how much a company is worth changes, the stock price is expected to change along with that. As such when Apple or any other company comes out with a new product there are three things that can happen which will affect the stock price all else being equal:

1. The product will sell about as much as shareholders anticipated it would. In this case the company and therefore its stock was valued correctly beforehand because the profits made from the product were anticipated and therefore already factored into the stock price. So with this in mind the stock price should not move much based on this.

2. The product will sell less than people anticipated it would. In this case the company and therefore its stock is valued incorrectly because the profits made from the product are less than people anticipated. So with this in mind people are going to sell the stock because it is overvalued and the stock price should go down.

3. The product will sell more than people anticipated it would. In this case the company and therefore its stock is also valued incorrectly because the profits made from the product are more than were anticipated. In this case people are going to buy the stock because it is undervalued and the stock price should go up.

So, to answer your question if peoples forecasts of the profitability of apple or any other company is changed by a new product then, all else being equal, the stock price should change accordingly.

This is a bit of a complicated concept but an important one to understand so if there are any other questions, or if anyone else has input on this one please feel free to post it below.

Best Regards,
Dave

Thank you so much for the awesome breakdown and walkthrough. Glad I had stumbled onto your youtube videos and VERY awesome job in putting them together.

Thank you for contributing to the community and let me know if you have any other questions.

Best Regards,
Dave