What does the stock price mean?

Todays lesson is pretty easy:
Everything you really should know about a stock can be narrowed down to pricing. Why does a stock go up or down? How do I forecast it?

To start off, imagine you own a company and decide to issue stocks. This means you split the whole company up in little, equal-sized pieces worth a certain percentage of your firm (you can also reissue stocks, but that's too complex for now).
I will skip all useless information I could throw in at this point and go directly to the important part:
How much is my stock really worth? In deciding how much a company as a whole (and therefore each stock) is worth we have two methods:
1. book value
The book value is basically everything the company owns. For understanding:
Suppose you're a producer of soft drinks. Your company owns a factory building where you mix the drinks, also you own all the machinery needed, plus you own an office building which is packed with desks, computers, chairs, etc.
Add all this stuff up and this is the book value of your firm (roughly). In econimist language we say: The value of a firm is determined by the value of its assets.

2. market value
Suppose, you are not any softdrink producer, you are Coca Cola Inc.
The market value is more or less the current stock price (if you haven't got any debt) * the number of stocks.
The thing is, the stock price is often enough above book value. Why is that so? Well, it's hard to tell how much a firm is really worth, because if you would buy Coca Cola, the company assets (along with the secret formula) might not be the expensive part, but the brand itself is: If you are coca cola, you are able to sell your products at a higher price than any no-name soft drink producer.
So we have to keep in mind how your company might make profits in the future.
You see it's pretty hard to calculate the exact price of a stock.

What can you do then?
Let us first take a look at why stock prices rise and fall:
We are back at your company coca cola.
The current stock price is 50$. Out of the blue McDonalds announces that they will team up with you and firmed a contract saying that for the next 100 years they will annualy buy drinks off you worth 1 million/year.
So how does that affect your company? Your stocks have to be worth more than before, since you know that you will earn an extra amount of cash each year.
So your stock price goes up to, say, 55 $ - meaning you just made your first 10% (of course you own a good amount of stocks in your own company).

Unfortunately, a month after that the fat-people-lobby managed to sue McD. for their unhealthy food and the whole court thing made McD. go bankrupt. This means the deal above will never take place. Therefore your stocks fall back to 50$. Easy come, easy go!

There is a certain saying:
Stocks rise on rumors and fall on news.

Mostly instead of the scenario above it goes like this:
Your mate Dave works at McDonalds. He overheard a conversation of the current CEO saying that he wants to team up with Coca Cola. Instantly Dave tells you and everyone he knows. The stocks rise, because investors expect Coke to have a deal no one yet knows about.
This is called speculation. Although you don't know how things end up, you have some kind of feeling how they could go (please, don't ever listen to an investment advice from a bro working at McDonalds - you will regret it, trust me).
Just remember 5th grade: Only because Dave told you he kissed Anna McGee doesn't mean it really happened (or it will ever happen for that matter).
So if things go bad, because maybe McDonalds denies any future plans with coke(or Anna with Dave), your stocks will fall again.
On the other hand they might rise even more if rumors are confirmed by the firm.
Interesting, isn't it?

To sum up the whole thing :
If you buy a stock, you need some sort of idea why the price could rise. This can be anything: Whether you believe Apple's iPad to be the next big thing or Amazon's Kindle (buy one of the two then, or maybe even both).