Why do Stock prices change frequently?

What makes the stock price change all the time? The answer to this question could be as simple or as complicated as one wishes it to be. At the most basic level, stock prices move as a result of what we call market forces. Market forces is the word used to describe supply and demand. So, a stock will move depending on its demand versus its supply. If more people want to buy a stock i.e., demand than sell it i.e., supply, the price will move higher. In the opposite case, there would be greater supply than demand. Consequently, the price will fall. As William O’Neill, a very famous stock broker said, “It takes big demand to move supply up, and the largest source of demand for stocks is by far the institutional buyer. When the major investors in the market act, they exert tremendous influence over stock prices. Those are institutions such as mutual funds, pension funds, banks, etc. They exert the force due to their share size on the stock. These large transactions tend to drive prices up or down depending on the degree of buying or selling.

How can you tell if people are buying or selling a stock?  Well, there is something called volume of a stock. The volume of a stock basically tells you the number of shares being traded during a period of time. Therefore, a large increase in volume percentage can indicate increase in demand from those institutional investors. Keep in mind that institutional investors aren’t the only ones who could make stock prices change. Regular investors can, too. Its just that it will take more investors to deploy the same amount of capital as institutional investors do.

Understanding supply and demand is easy. What gets a little more complicated though is figuring out why people like or dislike a particular stock. Th reason why it is so difficult to understand is because every investor has his or her own strategy to be executed. But this comes down to figuring out what news is positive or negative for a company. The principle theory is that the price movement of a stock indicates what investors feel is a company’s worth. To complicate things, the stock price doesn’t only reflect the company’s current value but also it reflects the growth that investors are expecting in the future. Further what affect a company’s value are its earnings. Earnings are basically what the company makes in profits. Publicly trading companies are required to show their earnings four times a year, once each quarter. Since most of those companies show their earnings at around the same time, investors call those periods earnings season. Investors watch company earnings with a lot of attention. If a company’s results are better than expected, the stock price will jump. But if a company’s results disappoint, the price will sink.

Obviously, earnings aren’t  the only way that public sentiment can change concerning a stock. A famous example is the 2000 dot-com bubble when dozens of internet companies rose to have huge market capitalisations without making the smallest of profits. The fact that the prices move that much shows that there are many other factors besides earnings that influence stocks. So, in conclusion, what makes a stock price change? No one really knows for sure. Ultimately, it is the investor sentiments and expectations that affect a stock price!

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