why do stock prices rise and fall
Let s start with your last question first how are stock prices determined? Shares in most large established corporations are listed on organized exchanges like the New York or American Stock Exchanges. Shares in most smaller or newer firms are listed on the NASDAQ an electronic system that tracks stock prices. Every time a stock is sold, the exchange records the price at which it changes hands. If, a few seconds or minutes later, another trade takes place, the price at which that trade is made becomes the new market price, and so on. Organized exchanges like the New York Stock Exchange will occasionally suspend trading in a stock if the price is excessively volatile, if there is a severe mismatch between supply and demand (many people wanting to sell, no one wanting to buy) or if they suspect that insiders are deliberately manipulating a stock s price. But in normal circumstances, there is no official arbiter of stock prices, no person or institution that decides a price. The market price of a stock is simply the price at which a willing buyer and seller agree to trade. Why then do prices fluctuate so much? The vast bulk of stock trades are made by professional traders who buy and sell shares all day long, hoping to profit from small changes in share prices. Since these traders do not hold stocks over the long haul, they are not terribly interested in such long-term considerations as a company s profitability or the value of its assets.
Or rather, they are interested in such factors mostly insofar as news that would affect a company s long-term prospects might cause
other traders to buy the stock, causing its price to rise. If a trader believes that others will buy shares (in the expectation that prices will rise), then she will buy as well, hoping to sell when the price rises. If others believe the same thing, then the wave of buying pressure will, in fact, cause the price to rise. Back in the 1930s, economist John Maynard Keynes compared the stock market to a contest then popular in British tabloids, in which contestants had to look at photos and choose the faces that other contestants would pick as the prettiest. Each contestant had to look for photos likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. Similarly, stock traders try to guess which stocks other traders will buy. The successful trader is the one who anticipates and outfoxes the market, buying before a stock s price rises and selling before it falls. Financial firms employ thousands of market strategists and technical analysts who spend hours poring over historical stock data, trying to divine the logic behind these price changes.
If they could unlock the secret of stock prices, they could arm their traders with the ability to always buy low and sell high. So far, no one has found this particular holy grail. And so traders continue to guess and gamble and, in doing so, send prices gyrating. For small investors, who do hold stock for the long term and will need to cash in their stocks at some point to finance their retirements, the volatility of the market can be a source of constant anxiety. Every time a share in, say, General Electric is traded, the new price is used to revalue all outstanding shares just as the value of your home appreciates when the house down the block sells for more than a similar house sold last week. But the value of your home wouldn t be so high if every house on your block were suddenly put up for sale. Similarly, if all ten billion outstanding shares of General Electric or even a small fraction of them were put up for sale, they wouldn t fetch anywhere near the current market price. Small investors need to keep in mind that the gains and losses on their 401(k) statements are just hypothetical paper gains and losses. You won t know the true value of your stocks until you actually try to sell them. Ellen Frank teaches economics at Emmanuel College and is a member of the Dollars Sense collective. Did you find this article useful?
Please consider supporting our work by or. Have you ever consistently watched the price of a stock? You probably noticed that the price changed everyday. It may have went up one day, down the next and back up the following day. That s typical for any stock. But what causes a stock price to change so often? It s simple, all kinds of things So, why does a stock price change? The short answer is: nobody knows specifically. The Dow is down 50 points as investors react to news of [X]. Stop it, you re just making stuff up. Stocks are down and no one knows why is the only honest headline in this category. *Taken from Morgan Housel s article There are many reasons for a stock price to change, but there is no one person that can tell you exactly why a specific stock s price changed on any given day. Enough about what we don t know, let s talk about what we do know The most foundational aspect of the stock market (like any market) is supply and demand. It s like anything else, if there are more buyers than sellers, the prices rise. If there are more sellers than buyers, the prices fall. That explains the basic economic reason that a stock price would change, but that doesn t really help you much, does it? Stock traders are different from investors. It s not necessarily bad to be a stock trader, but it s not really my idea of sound financial practice and 9 times out of 10 it s about as safe as Vegas.
So, what do traders notice about stock prices? Stock traders attempt to track every single change. That s a lot, considering that stock prices change all the time due to: Company news good or bad. Earnings reports good or bad. Popular stock advisers endorsing or denouncing a stock. Analysts opinions. Investors don t really care about stock price changes. Investors are not affected by trivial news and an earning miss here or there. The market fluctuates. All the time. It s too stressful to worry about every movement. Investors don t base their decisions on a stock price. Stock prices don t matter. We will never fully know the exact reason for a stock price change in any situation. A stock price alone doesn t show you the value of a company. We don t invest in a company s stock price, we invest in the company. Whether you invest in individual stocks, index funds or mutual funds you shouldn t let stock prices alone affect your decisions. You can watch the market every single day if you want to, but don t let the daily changes lead you to make changes in your portfolio. Hopefully this article gave you an insight into some things that can affect a stock price basically everything can. More importantly, hopefully you understand why stock prices don t matter. Photo Credit:,
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