Originally when a stock is floated, the share is issued at a fixed price, but once the stock hits the market the price will be determined by supply and demand. A company's intrinsic value generally appreciates over time since few companies distribute all profits to shareholders as dividends, and as retained money and increasing profits build up, so does the value of the company.

Value and price, however, are different things. While careful calculation and auditing can often place a number on the value of a stock, it is the expectations of market participants that set the price. Regardless of the underlying value of a stock, hype and fear shape the market price.

Trendy areas such as high tech and Internet have often attracted ridiculous stock market prices, with small Internet concerns with only modest profits or even vast losses attracting enormous market capitalisations, while during depressed markets fantastic value can be found. It is frequently said, and absolutely true, that stock prices are a psychological phenomena.

An old investment parable, told by Ben Graham at first, and popular with those who use Warren Buffett's techniques, is the story of Mr Market. Mr Market is your new business partner. Every day Mr Market will quote the price he is willing to buy your share of the business from you and quote the price he will sell you his share of the business. Mr Market is a manic depressive, sometimes he gets all happy and optimistic and excitable, and he offers you very good prices to buy your share. Other times he feels gloomy, and thinks it is the end of the business, so he is willing to sell you his share for whatever you will give him. This behavior is silly and makes no sense, after all your share doesn't change value just because he is having an optimistic or pessimistic day, so his regular shifts of mood routinely allow you to take advantage of him, you buy your share very cheaply one day, sell it for a high price the next, Mr Market is still happy and still wants to buy, but then he gets sad and wants to sell you his share again for next to nothing. You buy it back and wait until he feels like buying.

But you see, the best thing about dealing with Mr Market is that he has a short memory and never feels snubbed if you ignore him. If Mr Market wants to pay too little for your share, you ignore him completely, as you can do when he expects you to pay too much for his. You can take advantage of him and let him go through his little phases while taking enormous profits. Somehow, no matter how much money he loses, he is always able to keep up this behaviour and never fails to offer a bid to buy or sell your share.

Although a rather silly little story, it actually sums up quite well the reality of market moods. Bull and bear markets are just the same, the frenzies and panics of Mr Market are played out every day in the world share markets. You can take advantage of the market by knowing when the market is just in one of those moods, and take a position to profit.

In fact lows and highs will always occur at the worst possible moment as far as unsophisticated investors are concerned, which makes perfect sense when you consider that the very top by definition will be the point at which the last of the optimists have bought, and the low is where the last of the pessimists have sold.

There is a common but extremely naïve view held by many that the sheer volume of money flowing into the market today by various super funds and such that all this money will cause the market to simply continue going up in perpetuity, as if the days of market corrections are well past, and stocks will always appreciate.

This is a dangerous view, and ridiculous when you consider the simple nature of a market. In order for shares to change hands, there must always be a buyer as well as a seller, but who would sell if everyone knows that prices will always rocket up indefinitely? Wouldn't sellers, since there are always plenty of those, provide a significant counterforce, driving down prices eventually? Obviously something does not compute here. Share prices are set not by the volumes of cash flowing in or out, but by how the market values a stock, by the opinions held by those with the money. Right in the middle of the great crashes there have always been people buying, this had to be the case or else prices would simply drop to zero, these funds will become that buyer during bear markets, but the prices will be set by expectations, not by money flowing in, often not even by "reality", but simply by whatever the market thinks is a share's true worth. Clearly when an asset appreciates too much there comes a time when it will be simply too expensive, your return will shrink and you will move your money into some other investment.

The market is a great creator of wealth for intelligent investors but just as great a destroyer for those that do not understand how it works. Stock values are determined by the value of the companies they represent. When a rally brings prices up to such high levels that they no longer have the slightest element of realism about them, a crash or extended bear market is inevitable. Many complicated explanations are given for why the market crashes, usually by commission-based investment professionals that wish to assure clients that such a thing cannot happen again. There may well be some trigger event that sets off a crash, but political scandals, assassinations and wars do not necessarily have a strong effect on company earnings. These triggers may set off irrational short term swings in price, but they have little to do with the cause of crashes that sometimes follow, don't blame the spark, blame the factors that put that powder-keg there in the first place. The reason why markets crash is because excessive speculation on capital appreciation has pushed up prices too high too quickly. There is no other reason for a crash, or any correction in any investment type. Whether you are talking about shares, property, collectibles or anything else, corrections occur because the underlying investment has gotten too expensive. When too much money is put into any investment vehicle falls in price can literally erase that money. Vast sums of money vanish into nothingness on a falling price. Putting billions of extra dollars into shares, without doing anything to increase the profits of companies, is guaranteed to wipe out all that money, not grow it. The investment industry does very little to add value to its holdings, merely trading pieces of paper on various technical indicators, with little regard for fundamental realities. Fundamentals do not change, that is why they are called fundamentals.

The best time to buy stocks has always been, and will always be, in the time immediately following a bear market. A lot of sad, burnt investors will have sold their shares, despondent and never believing that they will ever pay off, the news on the economy will probably be bleak, with many companies failing, and the usual chaos on the employment front. No one is talking about the market, it is unfashionable now and considered "risky", anyone starting a conversation on stocks will be regarded with great suspicion, as if they were somehow promoting gambling and recommending gaining wealth through the casino! The reason why this is a good time to buy is of course because every single pessimist will already have sold. Provided you do your analysis correctly and identify stocks able to weather out the present crisis, these stocks will make immense gains over the next few years.

Conversely, the worst time to buy is when the stock market is peaking, when you see the pulp current affairs shows running story after story about how mums and dads are all striking it rich in the market, you know the end cannot be too far away. Stocks will be by then trading on high price multiples, that is to say you will need to pay a lot of money to share in whatever profits the company is making. In addition at this time you will see a lot of "garbage" floats, new companies starting up, coming across with an idea or a technology that is unlikely to make any profit for a long time, if at all, and yet these stocks are often eagerly snapped up by all the venture capitalist wannabes who populate the peanut gallery by this time.

Warren Buffett said it best I think. "When the price of a stock can be influenced by a herd on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical."