What makes stock prices go "up" and "down"?

by Amandeep Singh

in Stock Basics

Stock prices change every day because of market forces. By this we mean that stock 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. (Basics of economics!)

Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what people are selling. If you know this you will know what prices go up and what prices go down!

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people.

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, it isn’t going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).

Dalal Street watches with great 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 are better than expected, the price jumps up. If a company’s results disappoint and are worse than expected, then the price will fall.

Of course, it’s not just earnings that can change the feeling people have about a stock. It would be a rather simple world if this were the case! During the “dotcom bubble”, for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors other than current earnings that influence stocks.

So, what are “all the factors” that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn’t possible to predict how stock prices will change, 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 is that stocks are volatile and can change in price very very rapidly.

Just remember this: At the most fundamental level, supply and demand in the market determines stock price.

There are many types of techniques and methods that investors use to figure out whether a stock price will go up or down! We will try to give you an introduction to these techniques in this article.

But before we go into the concepts of stocks picking, and the techiques of analysis, let us understand one last basic thing….

Next – What are the Sensex & the Nifty? >>

{ 3 comments… read them below or add one }

Rafaquat Ali May 4, 2012 at 11:37 pm

i am a student of m.phil economics at the islamia University of bahawalpur, punjab, Pakistan. i am writnig a thesis on determinents of the variability of stock prices. i m v v impressed of ur work on that …………

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Amandeep Singh January 2, 2013 at 5:21 pm

Thanks, Rafaquat 🙂

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midcapshare September 23, 2012 at 6:33 pm

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