Market forces affect stock prices daily. Supply and demand affect share prices. When demand exceeds supply, the price of a stock rises. If more people wanted to sell than acquire a stock, supply would exceed demand, and the price would fall.
Simple supply and demand. Why do individuals like some stocks and not others? This involves determining positive and negative corporate news. Every investor has their own ideas and strategies for this problem.
According to theory, a stock’s price movement reveals how much investors value a company. Don’t equate company value with the stock price. A company’s market capitalization is its stock price times its outstanding shares.
A $100 per share firm with 1,000,000 outstanding shares is worth less than a $50 per share company with 5,000,000 outstanding shares ($100 x 1,000,000 = $100,000,000 vs. $50 x 5,000,000 = $250,000,000). Stock prices don’t just reflect a company’s current value; they also reflect expected growth.
Earnings affect a company’s worth most. Long-term, no company can thrive without earnings. It’s logical. A corporation can’t survive without profits. Companies must report quarterly earnings (once each quarter). Wall Street closely watches earnings seasons. Analysts base firm value on earnings projections. If a company’s earnings surprise, the price rises. If a company’s results disappoint, the price falls.
Not only earnings can influence a stock’s sentiment (which, in turn, changes its price). This would be a simple world. During the dot-com bubble, many Internet companies reached billion-dollar market caps without earning a profit.
As we all know, these valuations didn’t hold, and most Internet companies saw their values drop. Still, the price movement shows that factors other than earnings affect stocks. Investing variables, ratios, and indicators number in the hundreds. Some, like the P/E ratio, are well-known, while others, like Chaikin Oscillator or MACD, are obscure.
This subject’s key points are:
- Supply and demand determine stock price.
- A company’s value equals price times outstanding shares (market capitalization). Comparing firms’ share prices is pointless.
- Theoretically, earnings determine investors’ valuation of a company, but there are other factors. Investors’ attitudes, opinions, and expectations affect stock prices.
- Many theories try to explain stock prices. No single hypothesis explains everything.
So why do stocks fluctuate? Nobody truly knows. Others say you may foresee stock price changes by making charts and looking at past price fluctuations. Stocks are volatile and can change prices quickly. That much is known.
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