In glancing through the Share prices listed in the newspaper one might wonder how Shares are priced and what affects price movement. After all, there is a wide variety of prices and some well-known companies are traded for relatively low prices while obscure listings may sell at high prices.

To a certain extent Share prices are determined by investor confidence but that confidence in turn is based on real or perceived performance. Companies report their financial status on a quarterly basis when they disclose cash flow, sales and earnings. These hard numbers are the foundation of a company's worth, but investor speculation can undermine or override actual financial data. 

Rumours abound on the Share market, and if there is news that a company is about to make a strategic move buyers may flock to buy that Share. As with any other market, the principal of supply and demand applies. If there is a sudden upsurge in investor interest, the price of a Share will rise accordingly. Conversely, fear among investors can cause a Share price to plummet. In the long run, however, company performance and worth are the biggest factors in determining Share prices.

Share prices are available from many sources. Newspapers carry market summaries of the day's movements and online sources can provide current prices around the clock. Share brokers can also provide quotes – either online or by telephone in the case of full-service brokers.

A Share quote table in a newspaper or Internet web site is full of useful information that can help the investor make decisions about buying or selling Shares. Being able to read a Share table is a necessary skill for anyone interested in the Share market.

A typical table looks something like this:  
 
                  Latest Change        52 Weeks
Symbol Price   Net       %   Time High   Low     Volume  High Low  
                 
BCE   31.150  -0.480 -1.52 16:57 31.750 31.110 3,643,000 33.000 27.150   
BGM   17.060  -0.280 -1.61 15:54 17.300 17.040 207,400  26.850 17.110   
IBM   79.820  -0.290 -0.36 16:01 80.680 79.560 4,999,200 99.100 71.850   
MSFT   24.670  -0.310 -1.24 16:00 25.050 24.670 73,696,700 27.940 23.820 

The first column tells you the name of the company by its ticker symbol – a 3 or 4 character abbreviation. BCE is Bell Canada Enterprises and MSFT is Microsoft. Ticker symbols can be looked up on the Internet.

The latest price is the price at the time of publication of the table. In newspapers this would generally be the day's closing price, but Internet tables may be updated every few minutes. Publicly viewable Share prices on the Internet usually have a lag of 15 or 20 minutes.

Change is the difference between the previous day's closing price and the current quote. Time shows the time of the last transaction. High, Low, and Volume all refer to the current (or last) trading day. High is the highest price the Share sold for, Low is the lowest price, and Volume is the number of shares that have been traded. Finally the 52 week High and Low shows you the highest and lowest prices in the previous year.

There may be additional columns for information about Bid Price (the price a buyer is willing to pay), Ask Price (the price a seller is willing to sell), Price/Earnings ratio (P/E – the Share price divided by the earnings per share), Market Cap (outstanding shares multiplied by current market price), and Dividends Per Share (the current annual dividend the company pays).

There are two basic ways to trade the Share market – shooting in the barrel or using strategies to determine which Shares to buy, when to sell, and how to protect your investment dollars. Needless to say, strategies outperform barrel shooting by a large margin. There are, however, hundreds of trading strategies to choose from. Of all of these there are a couple of tried and trued methods that have worked well for investors over many years. The beginning investor is advised to investigate some of these basic strategies and see for himself how they perform. New strategies can be explored once the basic ones are well-understood.

Hedging with Shares
Hedging is a way of protecting an investment by reducing the risks involved in holding a particular Share. The risk that the price of the Share will drop can be offset by buying a put option that allows you to sell at the Share at a particular price within a certain time frame. If the price of the Share falls, the value of the put option will increase.

Buying put options against individual Shares is the most expensive hedging strategy. If you have a broad portfolio a better option may be to buy a put option on the Share market itself. This protects you against general market declines.  Another way to hedge against market declines is to sell financial futures like the S&P 500 futures.

Dogs of the Dow- what can we learn?
This is a strategy that became popular during the 1990s. The idea is to buy the best-value Shares in the Dow Industrial Average by choosing the 10 Shares that have the lowest P/E ratios and the highest dividend yields. The companies on the Dow Index are mature companies that offer reliable investment performance. The idea is that the lowest 10 on the Dow have the most potential for growth over the coming year. A new twist on the Dogs of the Dow is the Pigs of the Dow. This strategy selects the worst 5 Dow Shares by looking at the percentage of price decline in the previous year. As with the Dogs, the idea is that the Pigs stand to rebound more than the others.

Buying on Margin
Buying on margin means to buy Shares with borrowed money – usually from your broker. Margin gives you more return than if you were to pay the full cost outright because you receive more Share for a lower initial investment. Margin buying can also be risky because if the Share loses value your losses will be correspondingly greater. When buying on margin the investor should have stop-loss orders in place to limit losses in the case of market reversal. The amount of margin should be limited to about 10% of the value of your total account.

Dollar Cost and Value Averaging
Dollar cost averaging involves investing a fixed dollar amount on a regular basis. An example would be buying shares of a mutual fund on a monthly basis. If the fund drops in price the investor will receive more shares for his money. Conversely, when the price is higher, the fixed amount will buy fewer shares. An alternative to this is value averaging.  The investor decides on a regular value he wishes to invest. For example, he may wish to invest $100 a month in a mutual fund. When the price of the fund is high he puts a higher dollar amount in the fund and when the price is low he spends less money. This averages out his investment to the original $100 per month. Value averaging almost always outperforms dollar cost averaging as a percentage return on the money invested. When used as part of a broader trading strategy it can help secure the growth of your investment fund.

 Share indexes are a statistical average of a particular Share exchange or sector. Indexes are composed of Shares which have something in common – they are all part of the same exchange; they are part of the same industry; or they represent companies of a certain size or location.

 There are many different Share indexes, the most common in the United States being the Dow Jones Industrial Average, the NYSE Composite index, and the S&P 500 Composite Share Price Index. Share indexes give an overall perspective about the economic health of a particular industry or Share exchange. There are several different ways to calculate indexes. An index based solely on the price of Shares is called a 'price weighted index'. This type of index does not take into consideration the importance of any particular Share or the size of the company. An index which is 'market value weighted', on the other hand, takes into account the size of the companies. That way, price shifts of small companies have less influence than those of larger companies. Another type of index is the 'market-share weighted' index.  This type of index is based on the number of shares rather than their total value.

Index Funds

As well as giving an overall grade to a particular economy, indexes can also be an investment instrument. Mutual funds based on indexes are known as 'passively managed mutual funds' and have been shown to consistently outperform managed funds. Mutual funds based on an index simply duplicate the holdings where the index is based on. Thus if the Dow Jones rises by 1% the fund based on the Dow Jones also rises by the same amount. This has the advantage of lower costs for research and transactions – savings that can be passed on to the investor who participates in these funds.

The Big Indexes

The Dow Jones Industrial Average is one of the best-known indexes in the United States. It follows the Share movements of 30 of the most influential companies in America including General Electric, Coca Cola and General Motors. It is a 'price-weighted average' index – thus giving more influence to more expensive Shares. Some analysts feel that the price-weighting does not give an accurate picture of Share market movements and that 30 companies are not enough to form an accurate assessment.

The S&P 500 Index is based on 500 United States corporations. These companies are carefully chosen to represent a broad slice of economic activity. It is second in influence after the Dow Jones and is felt to be an accurate predictor of the state of the United States economy. Outside of the United States the most influential index is the FTSE 100 Index.  This is based on 100 of the largest companies listed on the London Share Exchange. It is an indicator of the British economy and is one of the biggest indexes in Europe. Other important non-US indexes are the CAC 40 from France and the Nikkei 225 from Japan.

The term 'Stock Market' is commonly used to encompass both the physical location for buying and selling stocks as well as the overall activity of the market within a certain country. When we hear an expression such as 'The stock market was down today' it refers to the combined activity of many stock exchanges i.e. the Australian Stock Exchange (ASX) in Australia, the New York Stock Exchange (NYSE), Nasdaq etc. in the United States.

The 'Stock Exchange' is the correct term for the physical location for trading stocks. Each country may have many different stock exchanges and usually a particular company's stocks are traded on only one exchange, although large corporations may be listed in several different locations. Stock exchanges exist throughout the world and it is possible to buy or sell stocks on any of them. The only restriction is the opening hours of each exchange. Most Stock exchanges for example operate from 9:30 a.m. to 4:00 p.m. Eastern Time in that country from Monday to Friday.

Other exchanges have similar opening hours based on their local time. If you want to trade on the Hong Kong Stock Exchange your order will be executed sometime between 9:30 a.m. and 4:00 p.m. Hong Kong time.

The major stock exchanges of the world are located in Japan (Tokyo Stock Exchange), India (Bombay Stock Exchange), Europe (London Stock Exchange, Frankfurt Stock Exchange, SWX Swiss Exchange), the People's Republic of China (Shanghai Stock Exchange) and the United States. 

The major exchange in the Australia is the ASX. Stock markets closely follow the economic health of a country. When the economy is doing well the market is bullish.  Bull markets occur during times of high economic production, low unemployment and low inflation. Bear markets, on the other hand, follow downtrends in the economy. Inflation and unemployment are rising and stock prices are falling.

 Fluctuations in stock prices are also driven by supply and demand, which in turn are determined to a large extent on investor psychology. Seeing a stock rise in price may cause investors to jump on the bandwagon and this rush to buy drives the price even faster. A falling price can have the same effect. These are short term fluctuations. Stock prices tend to normalize after such runs.

The stock exchange is only one of many opportunities to invest. Other popular markets include the Foreign Exchange Market (FOREX), the Futures Market, and the Options Market.

The FOREX is the biggest (in terms of value of trades) investment market in the world. FOREX traders buy one currency against another and can profit from small changes in value. Most FOREX trades are entered and exited in one 24 hour span, and traders have to keep a close watch on the market in order to make profitable trades.

The Futures Market is a market of contracts to buy and sell goods at specified prices and times. It exists because buyers and sellers of goods wish to lock in prices for future delivery, but market conditions can make the actual futures contract fluctuate considerably in value. Most investors in the futures market are not interested in the actual goods – only in the profit that can be realized in trading the contracts.

The Options Market is similar to the Futures Market in that an option is a contract that gives you the right (but not the obligation) to trade a stock at a certain price before a specified date. They can be traded on their own or purchased as a form of insurance against price fluctuations within a certain time frame.

All three of these markets are quite risky and require considerable knowledge and experience to prevent substantial losses. They also require close attention to market movements. Stocks, on the other hand, are less risky because movements of the market are usually gradual. Although short term investment strategies are possible, most view stocks as long term investments.