Fluctuations seem to be the only constant in the stock market.
But, why do stock prices change every second, how does the stock market work, and what affects these changes?
Let’s find out.
The stock market is a place where investors buy and sell investments or stocks, which are ownership shares in a public company. In 2018, only 12% of the British population have invested in stocks. Buyers and sellers negotiate the price of stocks and when they agree on a price, it becomes the new market quotation for the stock.
The main reason why stocks are going up and down is because of the law of supply and demand. In fact, the stock price algorithm is coded in its supply and demand.
Prices tend to rise when demand exceeds supply. In other words, if there are more buyers than sellers, the demand for that stock, share, or fractional share will push the price to go higher.
Consider the following example:
1,000 buyers want to buy one share of a stock for $10 but only 500 people are willing to sell theirs. The first 500 buyers purchase one share for $10. The rest raise their offer to $11, which would convince some of the previous buyers to sell for a profit.
Since the latest transaction determines their price, those shares now cost $11 until someone sells them for more or less.
But, what causes the high demand and market sentiment in the first place?
One of the most important factors that affect stocks’ prices is the amount of profit that a company makes, as well as its sales, and margin. The more a company earns, the more shares it has and the more they rise in value.
Investors are generally willing to pay more for a company that’s doing well, in hopes that it will continue to do so and they will eventually make a profit, ideally at a peak price.
In the world of social media, the answer to “why do shares go up and down?” is usually “because someone wrote something good about it on Twitter or Reddit” or “a media site reported on it.”
The demand usually goes up because investors generally believe that companies that are in the public eye are more likely to be doing well than those that aren’t.
The stock prices and demand can be affected by a company’s growth potential.
Investors regularly check on forecasts, analyst reports, and the news to get more information about the company to adjust the price accordingly. Negotiations between companies, mergers, and acquisitions can greatly impact stocks and the stock market.
Thus, even when a company doesn’t have strong earnings, its stock prices might be moving up if investors believe that the company will be more profitable in the future. This is especially important for those that invest in multiple assets.
A change in stock prices can occur as a result of alterations in interest rates.
Stock prices and interest rates usually move in the opposite direction. For instance, when the Bank of England raises interest rates, it becomes pricier for companies to borrow money, which causes stock prices to go down.
The stock market is constantly reacting to changes in the economy. Anything from unemployment rates to inflation can affect stocks and trigger swings in prices, especially if the change was unexpected, as investors are trying to predict whether it’s smarter to sell or buy stocks in certain industries.
Some investors argue that the overall market and sector movements determine the trajectory of the stock prices, rather than a company’s individual performance.
When a country goes to war or is in the midst of some type of conflict, its stock market prices usually take a dip.
This is because investors don’t want to put their money into something that may not be around for long. For example, when Russia went to war with Ukraine, a conflict that is still ongoing, the prices initially dropped because of the conflict but also continued to go down because many countries imposed severe economic sanctions on Russia.
Political unrest can also lead to stock price changes.
“Buy the rumour, sell the news” is a popular expression in trading. It means that when good news is expected, investors should consider buying stocks earlier because when the news ends up in the media, the price will move higher.
Similarly, allegations of fraud or that a company might sell, regardless of their authenticity, can affect stock market prices.
There are a number of factors affecting share prices in the stock market, but the main one is the law of supply and demand. By understanding the forces that drive stock market changes, you can make better investment decisions and profit from them in the long run.