Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.
That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1,000,000 shares outstanding has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding ($100 x 1,000,000 = $100,000,000 while $50 x 5,000,000 = $250,000,000). To further complicate things, the price of a stock doesn't only reflect a company's current value–it also reflects the growth that investors expect in the future.
The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, they aren't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.
Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dot-com bubble, for example, dozens of Internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most all Internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the P/E ratio , while others are extremely complicated and obscure with names like Chaikin Oscillator or Moving Average Convergence Divergence (MACD) .
So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stocks will change in price while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly.
The important things to grasp about this subject are the following:
- At the most fundamental level, supply and demand in the market determine stock price.
- Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.
- Theoretically earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes, and expectations that ultimately affect stock prices.
- There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.
FAQs
By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
What factors cause stock prices to change? ›
There are four main factors that can affect stock prices:
- Company news and performance.
- Industry performance.
- Investor sentiment.
- Economic factors.
For each share they buy, an investor owns a piece of that company. In large part, supply and demand dictate the per-share price of a stock. If demand for a limited number of shares outpaces the supply, then the stock price normally rises. And if the supply is greater than demand, the stock price typically falls.
What are the three main reasons stock prices go up? ›
In summary, the key fundamental factors are as follows: The level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share) The expected growth in the earnings base. The discount rate, which is itself a function of inflation.
What are the factors affecting stock prices? ›
Factors affecting stock markets
- Economic strength. Economic strength has a direct impact on the performance of the country's financial markets. ...
- Policies and regulations. ...
- Banking system. ...
- Institutional investors. ...
- Investor sentiment. ...
- International relations and geopolitical volatility. ...
- Forex fluctuations. ...
- Natural calamities.
External factors such as industry shifts, government regulations, or even severe weather that affects company operations can also influence price changes; investors and analysts weigh how those elements may influence a company's' performance in the future.
What is the main cause of fluctuations in stock prices? ›
Supply and demand
These price fluctuations are influenced and determined by the perceptions of investors. They monitor and follow the performance of companies and look at how much they're earning, their actual value and how they might perform in the future.
Why do prices move in stock market? ›
Some of the most common reasons include changes in the company's financial performance, shifts in market demand for the company's products or services, company's earnings, a positive change in market conditions, news, or an increase in demand for the company's stock and changes in the overall economic environment.
What is change in stock? ›
For a stock or bond quote, change is the difference between the current price and the last trade of the previous day. For interest rates, change is benchmarked against a major market rate (e.g., LIBOR) and may only be updated as infrequently as once a quarter.
How do stock prices change after hours? ›
Besides low volume, there is also limited liquidity during extended hours, which can lead to increased volatility, larger spreads, and greater price uncertainty. Plus, earning reports are typically announced after regular trading hours which can lead to major price swings.
In the short term, stocks go up and down because of the law of supply and demand. Billions of shares of stock are bought and sold each day, and it's this buying and selling that sets stock prices.
Who sets stock prices? ›
Companies work with investment bankers to set a primary market price when a company goes public. The price is set based on valuation and demand from institutional investors.
Why does the stock market keep going up? ›
Earnings Are Coming In Strong
“Companies continue to earn record profits,” says Zaccarelli. Those profits are a major component of stock performance, and market watchers expect more growth. “Analysts are increasing their earnings expectations, which is somewhat unusual,” Arone says.
How does stock price change? ›
If the demand for a particular stock increases for any reason, the stock price starts rising. As every sale attracts more bidders for that stock, the price moves higher. Similarly, if there is a drop in demand for a particular share, fewer bidders are attracted pulling the stock price low.
What factors cause stock prices to rise and fall? ›
By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
What are the four factors that affect price? ›
Four Major Market Factors That Affect Price
- Costs and Expenses.
- Supply and Demand.
- Consumer Perceptions.
- Competition.
Factors that cause stock prices to change.
- Demand and supply. Demand and supply are the top factors that can drive stock prices up or down. ...
- Company metrics. ...
- Industry particulars and developments. ...
- General market trends. ...
- Geopolitical factors. ...
- Interest rates in the economy. ...
- Investor sentiment.
Some of the common indicators that predict stock prices include Moving Averages, Relative Strength Index (RSI), Bollinger Bands, and MACD (Moving Average Convergence Divergence). These indicators help traders and investors gauge trends, momentum, and potential reversal points in stock prices.
Why are stock prices manipulated? ›
Market manipulation is a deliberate attempt to interfere with the free and fair operation of a market, typically for personal gain. It can take many forms, such as spreading false or misleading information, manipulating prices or trading volumes, or using unfair or fraudulent tactics to manipulate market conditions.
