What Causes Stock Prices To Change?

Stock Prices change every day from market forces present in the world. Share prices fluctuate because of supply and demand. If there are more people interested in buying a stock than selling, the price will move up. If there are more people wanting to sell a stock than buy, the stock price will go down. That is the main cause of price movements up and down within the stock price, otherwise known as supply and demand.

The concept most people find harder to grasp is why some stocks are more ‘liked’ than others. What makes a particular stock go up, whilst other stocks go down? Part of it is due to negative or positive news for a company. Some people view one particular news as good, and buy into a stock, whilst others will view the same piece of news as negative, and sell their stock. Everyone has their own ideas and strategies for determining the probability of the stock’s movements.

The main theory is that the price movement of a stock provides an indication of how investors feel about the company’s worth. The stock price does not necessarily represent a company’s value. This is represented by a company’s market capitalization. This is calculated by multiplying the stock price with the number of outstanding shares. So remember that a stock price does not represent a company’s value. It represents what investors think the company’s value should be, and the potential future growth of the company.

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One of the most important aspects of a company is its earning. This is the profit the company makes in a year. No company can survive for long without profit. Profit is what keeps a company afloat. A company not making money doesn’t last long in today’s competitive market. Public companies must report their earnings every quarter. This earning season is very much anticipated in the stock market. Stock market analysts make their predictions based on the earnings projected for a company. Generally speaking, if a company’s profits are better than expected, the stock price will increase. If a company’s profits are worse than expected, the stock price will decrease.

A company’s earnings is not the only factor that can change people’s opinion of a stock and its price. There are hundreds of other factors that can come to play as well. What they are, no one knows. There are thousands of theories investors have developed in order to attempt to explain the movements within the stock market: the price / earnings ratio, the Chaikin oscillator, the moving average convergence diverge, and many more.

There is no real hard and fast rule as to why stock prices change. No one really knows. Some people believe it’s not possible to predict the future movements within the market. Others believe it will move based somewhat on past price movements, and analyse graphs, and patterns to identify the future moves. The only thing we know for certain is that stocks are volatile, and change extremely rapidly.

The most important things to remember on this topic are:
  • Supply and Demand are the two biggest driving forces that determine the stock price.
  • A company’s market capitalization can be calculated by multiplying the price by the number of shares outstanding.
  • A company’s stock price does not necessarily represent the value of a company. You cannot compare the stock price of two companies, and assume the one with the higher stock price is ‘better’.
  • Many investors use a company’s earnings to determine the value of a company. However, there are many other elements, and indicators that ultimately affect stock prices.
  • There are thousands of theories that attempt to explain the movements of a stock price. However, there is no one theory that can predict or explain everything.