why do stock prices go up or down
If you are a beginning investor, you might wonder when it is a good time to buy or sell stocks. When attempting to understand why stock prices rise and fall it helps to understand the law of supply and demand. The only thing that is certain is that stocks are volatile and can rapidly change in price. If an item or service is in short supply, people will pay more for it; if thereвs an abundance, the price will fall. Whether youвre trying to get a ticket to the Super Bowl or trying to catch a last-minute flight during the holidays, the law of supply and demand comes into play. The hard part is comprehending what makes people like a particular stock and dislike another. To answer that you need to figure out what news is positive for a company and what is negative. Company News When a company releases news about a new product line or management change, be it good or bad, Wall Street and investors are sure to react. If itвs a positive reaction, the companys stock price will rise. If itвs bad, the stock price goes down. Without question the most important factor that affects a companyвs value, and therefore its stock price, is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. Public companies are required to report their earnings four times a year. If a companyвs earnings are better than expected, its stock price increases. But if a companyвs results are worse than expected, its stock price will fall. Simple as that. Mergers and Acquisitions Even if youвve only recently developed an interest in investing and the stock market, youвve no doubt seen or heard news accounts of one company buying another or two companies deciding to merge.
Those mergers and acquisitions affect companiesв stock prices too because they permit companies to move into new markets or to maintain dominance in their current market. Market share translates to dollars, which in turn affects stock price and therefore a companyвs bottom line. A few years ago when America Online announced it would buy Time Warner for $183 billion in stock, Time Warnerвs stock soared 40 points in a single day. Organization Restructure Ask yourself if youвd buy stock in a company that was constantly downsizing. If youвre smart, the answer to that question is no. Large, publicly traded companies seek to grow and gain market share, and they do it by consistently increasing earnings and revenue. How does a company increase earnings and revenue? Quality labor is a good place to start. Without quality management, no company can succeed over the long term; so when a CEO steps down, some might see this as being negative (stock prices fall), while others might accept the restructure as a much-needed change going forward (stock prices rise). Analyst Upgrades and Downgrades Everyday senior analysts from various firms upgrade or downgrade securities. Sometimes the more well known analysts do it publicly to dramatic effect. News of a strong buy rating with a 12-month price target of $1,000 can potentially send a stockвs price through the roof. Of course, the opposite is also true. Strong downgrades can send stock prices plummeting. In these instances, buyers and sellers should be cautious; such ratings are nothing more than one analystвs personal opinion.
Ultimately, the real reason a stock goes up and down in price is the number of buyers and sellers, which relates back to the law of supply and demand.
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.
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