Most people are familiar that a share price goes up and down, but what makes this happen?
When you go to buy a share through a brokerage, you will be matched to a sellers price. If you choose to buy at the market price, you will pay the price that the lowest seller(s) is willing to accept.
One simplistic way to value a share is via a Price-to-Earnings (P/E) Ratio: Which compares the share price to its total earnings. A high P/E might suggest overvaluation, while a low P/E might indicate undervaluation. Research houses like Morningstar provide this information. As of my last update in 2023, the average P/E ratio for companies listed on the Australian Securities Exchange (ASX) typically ranged between 15 and 25.
However, shares are not priced purely based on past information, but also future expectations. These expectations may include:
The company's future growth projections
The company's potential threats such as increased competition or government regulations
Market conditions: For example, share markets usually respond favorably to future expectations of interest rate cuts
Buying a single company share can produce above average rates of return, however, they can also result in you loosing money, including your whole investment if the company ends up going out of business.
For this reason, many long term investors favour purchasing diversified share market funds or ETFs whereby there is less risk because even if a single company fails, the remaining holdings in the portfolio could soften the loss.
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