Why do stock prices fluctuate?
Beginner Stock Market Investing
All you have to do is to look at a stock ticker or a computer monitor that shows online stock prices to realize that stock prices fluctuate and, depending on the market activity, can do so from minute to minute. It is this fluctuation that creates profit opportunities especially for short term traders who are in a position to take advantage of both increases and declines in prices. Generally speaking, these fluctuations are caused by the same economic factors of supply and demand that govern all financial markets. Your own common sense will tell you that when more people want to buy (the demand side of the equation) than the people who want to sell (the supply side of the equation), the prices are bound to go up. Conversely, if supply exceeds demand, the prices are bound to come down.
Understanding supply and demand is the easy part of the problem. What is far more difficult to understand and analyze is investor psychology or why people like a particular stock or dislike another at that particular point in time. One way of doing this may be to find out if there is any positive news or negative news that has influenced investors such as upbeat earnings or a gloomy outlook for the industry. For example, when businessman Isaac Dabah recently purchased 23% of Delta Galil Industries, confidence in the company grew and stock prices increased by 13% the next day. Many investors have their own ideas about what is good or bad for a particular stock and, if there are enough of them, they can influence market movements as a whole. In other words, if enough investors believe that something will happen, it becomes a self fulfilling prophecy because it will happen.
Probably the most popular theory revolves around the value that investors place on a company and holds that prices will correct upwards or downwards to reflect this value. Value in this context should not be confused with the stock price but what is called market capitalization. Market cap is the stock price multiplied by the number of shares that are outstanding. For instance, a company with 1 million outstanding shares and a stock price of $50 will have a market cap of $50 million. To make matters more complicated, the stock price does not just reflect current investor expectations but what the investor expects in the future. In market jargon, we would say that the stock price has been discounted to take into account future expectations.
Probably the single most important factor in determining stock prices is the earnings or profits of the company. Obviously, a company has to be consistently profitable in order to survive and thrive in the long run and no investor is likely to buy stock in a company that could go bust at any point in time. Most techniques of analysis use earnings as a basis for judging the future value of the company and there are literally hundreds of ratios and other financial techniques that you can use to determine whether an investment is attractive. Companies generally tend to announce their earnings every quarter and these events tend to be watched closely. Encouraging earnings will generally be reflected in increased stock prices and discouraging earnings in reduced prices.
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