How does the stock market work? Who decides the price of stocks? What is the logic behind the valuation of stocks?

Company wants to raise money for an investment. They offer ownership of the company in exchange for cash. An investment bank agrees to front the company the money and then redistributes ownership on the stock market.

The initial public offering (IPO) is when the investment bank starts selling shares to everyone else. Lots of time has passed between company filings and the IPO so that the public has had time to read enough information to make an investment decision about the company.

People want to grow their wealth, and rather than run a company themselves, they invest in companies doing things already. They buy shares of companies they like and sell them when they don't like them. After the IPO, it's basically just a farmer's market. Someone sells lettuce and someone wants to buy lettuce.

The price fluctuates because of supply and demand and perceived value. Someone maybe thinks that a company is worth $20/share and will buy every time the stock dips to $20/share. If there's a lot of people that want the stock, they know that every time it gets close to $20, this guy is going to buy it, so they have to pay more. Price goes up. Or maybe it's discovered that the farmer was using toxic chemicals to grow its fruit. Nobody wants to buy that fruit. The price will go down until someone is willing to the buy toxic fruit... because toxic fruit can be used as biofuel perhaps. Even damaged goods have a price that someone's willing to pay for it. Price finds those people, or people wait for those prices.

Let's circle back. What is "ownership" of a company? It's the ability to make decisions about the company's future and the ability to profit from its success. The more you own, the more you can influence its decisions. If you owned the whole company, you could change who you buy materials from (eg. Home Depot vs Lowe's vs your local lumber guy). If you own a small amount, you can at least voice your opinion. If enough people agree with you, you can affect change. If you own 1 share in 100 million, your opinion won't matter, but at least you can profit from the decisions of others collectively engaged in attempting to make profits together.

Profits are shared in 3 ways:
1: Dividends, either regular or 1-time: Profits are distributed.
2: Organic stock price appreciation: The company is worth more.
3: Inorganic stock price appreciation: Fewer shares = higher price/share.

Who participates in the stock market?
People who want to make money through short-term effort and research (traders), and people who want to make money through slow and steady operations (investors).

Traders: are looking to buy from the lettuce guy in the back of the market who has to price his goods cheaply because he has lots of lettuce left over and by the time people make it to his table, they've already purchased their lettuce. "Please buy my lettuce! It's good and it's cheap." Then, the trader will sell the lettuce at the front of the store for a profit. They know that location is important in selling lettuce, and they're willing to work for it.

Investors: are looking for opportunities to buy a great company at a good price. When people are fearful, they don't know what will happen. Cash is king, after all. The selling of everything reduces prices, artificially, as nobody really wants to buy a farm if they think that next year, the locusts will destroy everything. The investor will buy the farm when nobody else wants to, and perhaps also some tarp to keep the locusts out. After the locusts pass, they own the farm and go about their farming for the next 17 years until the locusts come back. They purchase businesses with steady cash flows and wait until the opportunity is right.

So who's buying and who's selling?

There is only 1 reason to buy:
* You expect to make money.

There are uncountable reasons to sell:
* You expect that keeping it will lose you money.
* The company no longer pays the dividends it promised.
* They fired their best manager.
* The services they provide are no longer wanted (fax machines)
* You think the price will go down and you can buy it cheaper.
* You need the money right now.
* You're retiring and want some of the money now.
* You're borrowing money to start your own business.
* A better company exists that didn't earlier.
* Your mathematical model says this price is too high.
* Your risk management rules say you're over-leveraged.
* ...

With so many reasons to sell, there always seems to be a seller to pair with a buyer. Since everyone believes what they want to believe, buyers will be there for the sellers to sell to.

Which brings me back to price fluctuations. Have you ever been at the grocery store and noticed that, for whatever reason, the line to check out suddenly formed just before you got in line? Humans do that at times. Random chance puts us in this situation from time to time, but more often then not, things we see influence our decisions. You saw the line forming and thought you should get in line before it gets too long. Were you done with all your shopping? Maybe you forgot something in your haste. It's even more pronounced with money. Anyway, prices fluctuate based on supply and demand, but every-so-often, there is just far too much of one or the other, which causes wild imbalances. There are people that anticipate these imbalances and attempt to profit from it, by perhaps, adding another cashier just before people start leaving their shopping baskets in the middle of the isles and walk out in protest. Fewer cashiers = cost savings, but fewer customers = opportunity lost. There is a balance to these things. The trick is to know where the customer's time threshold is... and the same in the stock market. How much higher can a stock go before people start selling to fill their pockets? Or how much lower before the investors step in to buy shares at a discount?