The value of a stock isn’t necessarily a fixed price, depending on market conditions and investor sentiment at the time. It’s important to understand that a stock doesn’t have a fixed price, but changes in response to supply and demand. When investors are buying the stock enthusiastically because they believe it will make for a good investment, the stock price will typically increase. Likewise, if investors are sensing weakness coming in the future and rush to sell or short the stock in question, you will find the value falling. The price is only one measure of a stocks true value.

Return on investment is just one of the many metrics we use to derive the true value behind a stock. Referring to the amount you look to the possibility of a strong return into the future based on the past history of solid growth.

Your personal stock picks and investing ideas should follow with some risk in betting with the odds. Investing involves taking some risks with your money, but it is not like betting on horses. A long shot can always win, even if everyone else is putting their money on the favorite (larger market capitalization). The direction of money influences the outcome in the stock market. If a lot of investors are buying X, than X’s stock price will go up. The shares of X become more valuable because more investors want it. Likewise, the reverse is true, so it is important to keep watch for the profit problem that exists.

You can earn big returns on your investments by selling your shares for more than you paid for them or by collecting dividends, or both! The profit that you will make on the sale of stock is known as a capital gain. Naturally, you don’t get to keep 100% of your profits. The tax man will collect taxes on gains as well as a commission on the sale; however, if you’ve owned the company for at least a year it is considered a long-term gain… this means a lower tax rate on your return. What does this equate to? That’s right. More income!

Dividends are a completely arbitrary portion of profits paid to shareholders each quarter. A company’s board of directors decides whether or not they will have a dividend kick-back, or if they will simply reinvest the profits. While smart investing ideas in and of themselves, qualifying stock dividends are also taxed at your long-term capital gains rate.

Program trading, meaning buying or selling either a “basket,” or group, of 15 or more stocks with a combined worth of more than $15 million, or all the stocks in a particular index, can cause abrupt price changes in stock or a group of stocks… potentially even in the entire market! Some program trades are automatically fired off every time a limit order hits the target price that have been set to limit losses. And, the traders may even initiate programmed buys to profit from large spreads they detect between offers to buy and prices asked by sellers. In order to control potentially serious consequences, exchanges have instituted restrictions, called circuit breakers, to stop trading activity altogether in the event that the market collapsed. This essentially limits a complete panic drop in the system, such as that which happened during the Great Depression.

Now that you know a bit more about how the markets flow and how the price of a stock sometimes reflects speculation more than actual internal value, you can start making money in the markets as an investor. Keep in mind that while big funds may move the markets, as an individual investor you have the potential to generate big gains by moving quickly and intelligently.