Stock Price Fluctuations

We all must have sometime or the other seen a stock chart and must have noticed how the prices of shares attached to different companies keep on changing. The digits keep juggling among each other and the color keeps shuffling between RED and GREEN. There are certain reasons associated with it that does not allow the stock price to remain stable and thus makes it change frequently. The reasons can be explained in various degrees.

First and foremost, the most basic reason of all is the functioning of the market forces of Demand and Supply. We are pretty much familiar with the relationship shared between the two, that is, for any economic good, if SS>DD, then due to excess supply, prices tend to fall; similarly if DD>SS, then due to excess demand, the prices tend to rise. As a stock is also an economic good, the same rule goes for it.

The next and a very significant reason for such fluctuations is the investors’ perception of the given company. The way an investor attaches value to any company determines its stock price. The price of a stock is not only indicative of the company’s current value, but also, the growth prospective of the company in future as expected by the investor.

Now, there must be a question as to how do the investors value the companies, what exactly are the parameters of their valuation. The answer to this question is very simple. It is the amount of earnings that a company is able to generate that affects the investors’ valuation. The valuation is directly proportional to the earnings generated by the company. Greater the earnings a company makes, better is the position that it occupies in the eyes of the investors.

These were just a few concepts as to explain the reasons for stock price fluctuation, but the list can go on depending upon the nature of assumptions made and techniques followed.

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