Why do investors buy stock that had appreciated?
For the same reason you wanted it when you bought it. No-one guarantees that you'll be able to sell the stock you hold, and in fact many people get stuck with stocks they'd like to sell, but no-one is buying. But if investors think there's a profit potential that is not exhausted yet - they'll want to buy the stock. People buy stocks with the intention of making money.  They either expect the price to continue to rise or that they will get dividends and the price will not drop (enough) to wipe out their dividend earnings. Imagine how foolish the people that bought Apple at $100 must have felt. It was up tenfold for the $10 it traded at just years prior, how could it go any higher?  Stocks have no memory. A stock's earnings may grow and justify the new higher price people are willing to pay. When FB came public, I remarked how I'd analyze the price and felt it was overvalued until its earnings came up. Just because it's gone down ever since, doesn't make it a buy, yet. From an amateur: Prices aren't entirely rational - they float, and the day to day prices of stock are an excellent example of this.  So how would you assign an appropriate value to it?  There is a logical minimum, the scrap value of the assets and the cash on hand.  However, that doesn't take into account the expectations for growth people have for that company.  If everyone thought a $100 mil company was going to be worth $200 mil by the end of next year, they'd still be willing to pay at a $150 mil price point now. That said, the market is big enough that it's easy enough to find someone who has those growth expectations.  They still expect it to be worth more in the future, and they'll buy it now.  And if no one buys at that price point, that's when prices start to fall. A few reasons.  First, it's hard to buy a stock that has never gone up, and isn't necessarily wise to do so.  Even if you just wait for a stock go down, what if you wait and it goes up two dollars, then drops 10 cents?  Has it gone up or down?  When should you buy it? In general, your idea is correct, the higher the price the less you should want the stock.  But in some sense, the past price is irrelevant, you can't buy it at the past price.  You should buy it now if it's the best option now.  And that is based on your assessment of whether it's future prospects are worth the current price (and in fact enough worth enough to make buying the stock the best economic decision you can currently make). Finally, the price may have gone up for a reason.  The company may have done something, or some information about the company may have become known, that affects it's future prospects.  That might make it a better deal, perhaps even better than it was before the price increase. "I understand you make money by buying low and selling high. You can also make money by buying high and selling higher, short selling high and buying back low, short selling low and buying back even lower. An important technique followed by many technical traders and investors is to alway trade with the trend - so if the shares are trending up you go long (buy to open and sell to close); if the shares are trending down you go short (sell to open and buy to close). ""But even if the stock price goes up, why are we guaranteed that there is some demand for it?""  There is never any guarantees in investing or trading. The only guarantee in life is death, but that's a different subject. There is always some demand for a share or else the share price would be zero or it would never sell, i.e zero liquidity. There are many reasons why there could be demand for a rising share price - fundamental analysis could indicated that the shares are valued much higher than the current price; technical analysis could indicate that the trend will continue; greed could get the better of peoples' emotion where they think all my freinds are making money from this stock so I should buy it too (just to name a few). ""After all, it's more expensive now."" What determines if a stock is expensive? As Joe mentioned, was Apple expensive at $100? People who bought it at $50 might think so, but people who bought at $600+ would think $100 is very cheap. On the other hand a penny stock may be expensive at $0.20. ""It would make sense if we can sell the stock back into the company for our share of the earnings, but why would other investors want it when the price has gone up?"" You don't sell your stocks back to the company for a share of the earnings (unless the company has a share-buy-back arrangement in place), you get a share of the earnings by getting the dividends the company distributes to shareholders. Other investor would want to buy the stock when the price has gone up because they think it will go up further and they can make some money out of it. Some of the reasons for this are explained above." "You seem to prefer to trade like I do: ""Buy low, sell high."" But there are some people that prefer a different way: ""Buy high, sell higher."" A stock that has ""just appreciated"" is ""in motion."" That is a ""promise"" (not always kept) that it will continue to go higher. Some people want stocks that not only go higher, but also SOON. The disadvantage of ""buy low, sell high"" is that the stock can stay low for some time. So that's a strategy for patient investors like you and me."
"There are a LOT of reasons why institutional investors would own a company's stock (especially a lot of it). Some can be: The company is in one of the indices, especially big ones. Many asset management companies have funds that are either passive (track index) or more-or-less closely adhere to a benchmark, with the benchmark frequently being (based on/exactly) an index. As such, a stock that's part of an index would be heavily owned by institutional investors. Conclusion: Nothing definitive. Being included in an equity index is usually dependent on the market cap; NOT on intrinsic quality of the company, its fundamentals or stock returns.  The company is considered a good prospect (growth or value), in a sector that is popular with institutional investors. There's a certain amount of groupthink in investing. To completely butcher a known IT saying, you don't get fired for investing in AAPL :)  While truly outstanding and successful investors seek NON-popular assets (which would be undervalued), the bulk is likely to go with ""best practices""... and the general rules for valuation and analysis everyone uses are reasonably similar. As such, if one company invests in a stock, it's likely a competitor will follow similar reasoning to invest in it.  Conclusion: Nothing definitive. You don't know if the price at which those institutional companies bought the stock is way lower than now. You don't know if the stock is held for its returns potential, or as part of an index, or some fancy strategy you as individual investor can't follow. The company's technicals lead the algorithms to prefer it. And they feed off of each other. Somewhat similar in spirit to #2, except this time, it's algorithmic trading making decisions based on technicals instead of portfolio managers based on funamentals.  Obviously, same conclusion applies, even more so. The company sold a large part of the stock directly to institutional investor as part of an offering. Sometimes, as part of IPO (ala PNC and BLK), sometimes additional capital raising (ala Buffett and BAC) Conclusion: Nothing definitive. That investor holds on to the investment, sometimes for reason not only directly related to stock performance (e.g. control of the company, or synergies). Also, does the fact that Inst. Own % is high mean that the company is a good investment and/or less risky? Not necessarily. In 2008, Bear Stearns Inst Own. % was 77%" Another benefit of holding shares longer was just pointed out in another question: donating appreciated shares to a nonprofit may avoid the capital gains tax on those shares, which is a bigger savings the more those shares have gone up since purchase. I agree with this. I like to buy stocks that are priced low according to value investing principles but set limits to sell if the stock happens to get priced at a point that exceeds X% annualized return, for instance 15% or 30% depending on preference. If the price goes up, I cash out and find the next best value stock and repeat. If the price does not go up, then I hold it which is fine because I only buy what I'm comfortable with holding for the long term. I tend to prefer stocks that have a dividend yield in the 2-6% range so I can keep earning a return.  Also I too like the look of MCD.  GE looks good as well, from this perspective. As said by others, buying shares of a company will not support it directly. But let's think about two example companies: Company A, which has 90 % stocks owned by supporters, and Company B, which has only 1 % of stocks owned by supporters. Both companies release bad news, for example profits have decreased. In Company B, most investors might want to sell their stock quickly and the price will plummet. In Company A, the supporters continue believing in the company and will not want to sell it. The price will drop less (usually, but it can drop even more if the sellers of Company A are very desperate to get rid of the stock). So, why is it important for the company to have a high stock price? In the short-term, it's not important. One example is that the company can release more stocks and receive more financing by doing that. Other reasons are listed here: http://www.investopedia.com/articles/basics/03/020703.asp The stock market in general likes monetary easing. With lower interest rates and easy cheap money freely available, companies can borrow at reduced cost thus improving profits. As profits increase share prices generally follow. So as John Benson said Quantitative Easing usually has a positive effect on stocks. The recent negativity in the stock markets was partly due to the possibility of QE ending and interest rates being raised in the future. There's a premium or discount for various stocks subject to influence by the alternatives available to investors, meaning investments are susceptible to the principle of supply and demand. This is easily seen when industries or business models get hot, and everybody wants a tech company, a social media company, or a solar company in his portfolio.  You'll see bubbles like the dotcom bubble, the RE bubble, etc., as people start to think that the industry and not its performance are all that matters.  The stock price of a desired industry or company is inflated beyond what might otherwise be expected, to accommodate the premium that the investment can demand. So if bonds become uniformly less attractive in terms of returns, and certain institutional investors are largely obliged to continue purchasing them anyway, then flexible investors will need to look elsewhere.  As more people want to buy stocks, the price rises.  Supply and demand is sometimes so elementary it feels nearly counter-intuitive, but it applies here as elsewhere. Oh, I see what you mean. It depends which side you look at it from: the company, or the individual investor.  For the individual investor, I guess it doesn't matter. As you said, you only buy the amount of stocks you can afford. What matters afterwards is whether the price of your stocks goes up or down. That's when the company valuation comes into play. If a company is overvalued, the stock prices are going to go down until they reach the [equilibrium point](http://en.wikipedia.org/wiki/Economic_equilibrium). Or, rephrasing, stocks go down when more people will want to sell than buy, creating an excess supply, so sellers will be willing to offer lower prices so you buy from them. Stocks go up when the opposite happens, more people will want to buy than sell, so buyers will have to offer more money to convince sellers to sell.  In essence, Facebook was overvalued, and not enough people were buying their shares, creating excess supply, so, sellers had to offer lower prices. Had Facebook been properly valued, people would've felt the stocks were a good price, everyone would've rushed to purchase, and stock prices would've gone up. If you do this, you own a stock worth $1, with a basis of $2. The loss doesn't get realized until the shares are sold. Of course, we hope you see the stock increase above that price, else, why do this? The main reason is that a public company is owned by its share holders, and share holders would care about the price of the stock they are owning, therefore the company would also care, because if the price go down too much, share holders become angry and may vote to oust the company's management. Amazon is stuffed full of dumb money.  People who like the company and therefore assume it must be a good investment.  Nothing about an investment makes sense when the PE is 100.  If you buy something like that you must assume 8% moves will happen pretty frequently. The reason a company creates more stock is to generate more capital so that this can be utilized and more returns can be generated. It is commonly done as a follow on public offer. Typically the funds are used to retire high cost debts and fund future expansion. What stops the company from doing it?   Are Small investors cheated?   It's like you have joined a car pool with 4 people and you are beliving that you own 1/4th of the total seats ... so when most of them decide that we would be better of using Minivan with 4 more persons, you cannot complain that you now only own 1/8 of the total seats. Even before you were having just one seat, and even after you just have one seat ... overall it maybe better as the ride would be good ... :) "Someone who buys a stock is fundamentally buying a share of all future dividends, plus the future liquidation value of the company in the event that it is liquidated.  While some investors may buy stocks in the hope that they will be able to find other people willing to pay more for the stock than they did, that's a zero sum game.  The only way investors can make money in the aggregate is if either stocks pay dividends or if the money paid for company assets at liquidation exceeds total net price for which the company sold shares. One advantage of dividends from a market-rationality perspective is that dividend payments are easy to evaluate than company value.  Ideally, the share price of a company should match the present per-share cash value of all future dividends and liquidation, but it's generally impossible to know in advance what that value will be.  Stock prices may sometimes rise because of factors which increase the expected per-share cash value of future dividends and liquidations. In a sane market, rising prices on an item will reduce people's eagerness to buy and increase people's eagerness to sell.  Unfortunately, in a marketplace where steady price appreciation is expected the feedback mechanisms responsible for stability get reversed.  Rapidly rising prices act as a red flag to buyers--unfortunately, bulls don't see red flags as signal to stop, but rather as a signal to charge ahead. For a variety of reasons including the disparate treatment of dividends and capital gains, it's often not practical for a company to try to stabilize stock prices through dividends and stock sales.  Nonetheless, dividends are in a sense far more ""real"" than stock price appreciation, since paying dividends generally requires that companies actually have sources of revenues and profits.  By contrast, it's possible for stock prices to go through the roof for companies which have relatively few assets of value and no real expectation of becoming profitable businesses, simply because investors see rising stock prices as a ""buy"" signal independent of any real worth." Because people bought their shares under the premise that they would make more money and if the company completely lied about that they will be subject to several civil and criminal violations. If people didn't believe the company was going to make more money, they would have valued their shares lower during the IPO by not forming much of a market at all. Shareholders can [often] vote for management to pay dividends Shareholders are sticking around if they feel the company will be more valuable in the future, and if the company is a target for being bought out. Greater fool theory Have the reasons you originally purchased the stock changed? Is the company still sound? Does the company have a new competitor? Has the company changed the way they operate? If the company is the same, except for stock price, why would you change your mind on the company now? ESPECIALLY if the company has not changed, -- but only other people's PERCEPTION of the company, then your original reasons for buying it are still valid.  In fact, if you are not a day-trader, then this COMPANY JUST WENT ON SALE and you should buy more. If you are a day trader, then you do care about the herd's perception of value (not true value) and you should sell. DAY TRADER = SELL BUY AND HOLD (WITH INTELLIGENT RESEARCH) = BUY MORE