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