Readers sometimes ask me questions they think are embarrassing. No, not those kinds of questions, but ones about money. They don't seem embarrassing to me -- I know most people never learned this stuff in school.
For example, someone will ask, "Who sets the prices of stocks each day?" Or "Why does a stock's value go up and down so often?"
The answer can be summed up nicely in a Latin quotation from the folks at ifa.com: "Res tantum valet quantum vendi potest." For the Latin-challenged, that means: "A thing is worth only what someone else will pay for it."
In other words, if a stock is seen as valuable, people will be willing to pay a lot for a share of it, and thus its price will be high. And vice versa. The stock market really works like an auction -- imagine one with baseball cards. A Mickey Mantle rookie card might be seen as very valuable, partly due to its scarcity. If I'm pretty sure I can sell it for around $100,000, I'd be willing to buy it for around $100,000 or less. That's its perceived value. But if suddenly several thousand more of those cards are discovered, the value will likely diminish -- just as suddenly.
The folks at ifa.com used the example of Bear Stearns
You can find countless examples of this every day. A few weeks ago, for instance, shares of Sun Hydraulics