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Investors profit from stock investing because they sell at a price that is higher than the purchase price.

The price difference determines the gain. Or loss.

Now, let’s stand back and think for a moment…

 

 

Have You Ever Wonder Why Stock Prices Fluctuate?

 

The stock market is a dynamic place. The price is a direct result of the market forces.

From an economical point of view, people usually treat it as a case of supply and demand.

When there are more people buying than people are selling (higher demand than supply) - the price goes up. The converse is true - price goes down when more people are selling than buying.

 

Straight Forward Isn’t It?

 

Not quite.

On further analysis, can we truly treat stock price movement as a result in shift of supply and demand? No.

Here is why…

Supply doesn’t change at all (assuming no stock split, issue of bonus shares, buy back etc).

Therefore we cannot say the supply has risen or dropped, simply because it doesn’t. The amount of stock shares in the market remains constant.

The shares just change hand.

To explain my point clearer, imagine 10 investors in a close room. They are holding a total of 50 shares. No more no less.

When trading starts - what happens?

A buyer looks for a seller. If a deal is good for both sides, a transaction takes place. Many of such deals will continue to happen throughout the trading day.

At the end of the session, the combined total is STILL 50 shares.

So looking at the demand-supply equation, we can safely establish supply will still be the same.

And what about demand then?

Demand remains the same as well! It is not possible to have more buyers than sellers!

Looking at the above example - when a buyer wants to buy - he needs to find a seller. No seller for the buyer - no transactions take place!

There will always be an equal amount of buyer and seller. One needs the other for something to happen.

From here we can establish one thing - the supply and demand equation doesn’t apply in share price movement!

 

Then What Actually Causes Stock Price To Move?

 

Think the stock market as similar to an auction system

If we are talking about stock price moving upwards, it is because there are people willing to buy at a higher bid price.

When the stock price goes down, transactions are going at a lower price.

Basically, expectations have changed. Expectations of the future - which prompts the buy up or sell off.

There are many factors that causes the change in expectations and outlook, such as..

• Financial performance (quality of earnings, dividends, debt etc)…
• Industry trends…
• Economical trends…
• Market sentiments (greed, fear etc)…
• Company management actions…
• Market perceptions and investors’ confidence…

 

I hope this has given you a clearer picture of why stock prices behave the way that they do.

Stocks price don’t magically go up and down on it’s own, or when it feels like it. No. 

The stock market. Dynamic. Daunting. But yet exciting.

 

Play It Smart,

Jag Foo

Chief Editor

StocksForGrads.com

 

 

This article is available as a PDF Download

“The Untold Reasons Behind The Fluctuation of Stocks” PDF Download

 

tag:Investing Basics Stock Price Movement Stocks Stocks Investment StocksForGrads

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