Introduction
The stock market is a leading market of the trading business where buying, selling, and issuing shares take place. With this, it also incorporates exchanges where the publicly held companies invest. So, we can say that the stock market is combined trading that includes markets and exchanges.
The stock trade can be made from any venue in a country; for example, in the UK, the biggest stock exchange is the London Stock Exchange, preferred by investors of the country and outside of the country to trade in stocks and other securities.
There are many factors responsible for share price movement, but supply and demand are the primary factors. Knowing about the stock market is the first step to why do stocks go up and down. If you know what affects stock price, you can easily understand which stock price will increase. In this article, we will discuss all the factors that can affect the price of the stock. Let’s dive right into it:-
Why do stocks go up and down?
Demand and supply:
Demand and supply is a big reason why do stocks go up and down. There are more buyers than sellers, then the stock price goes up, and if the sellers are more than the buyer, then the prices of the stock fall. If you want to predict whether there will be more buyers or sellers, then you need to do additional research.
The stock market allows buyers and sellers to purchase and sell stocks through a bidding process. Sellers depict prices at which they are willing to sell shares, and buyers put prices they want to buy. These prices are posted through bids. The process is called the bid-ask spread. When buyers agree to purchase stocks at the seller’s ask price, the stock price moves up to the next ask price of the seller. Let’s understand this through a simple example:-
- If there is a company named Q with a stock price of 100 dollars
- And buyer X is willing to purchase that stock at 101 dollars
- If buyer Y wants to purchase the stock at 102 dollars
- And buyer Z wants to purchase stock at 105 dollars
- If seller P is willing to sell stock at 101 dollars, trade between X and P will occur. X will purchase stock at 101 dollars from P
- If seller S is willing to sell stock at 105 dollars, then trade between S and Y will occur in which Y will purchase stock from S at 105 dollars.
This example shows how demand for stock can affect the price of the stock. When the buyer purchased stock at 101 dollars, and nobody wishes to buy the stock at that price, the price moves to the next slab of 105 dollars. The demand of buying at a low price exceeds the price of sellers willing to sell.
Increase share price:
Having more buyers than sellers can increase the stock price, but what lures buyers to purchase stock. One of the reasons why do stocks go up and down. Companies can be valued in numerous ways, but there are 2 ways we can do it by P/E ratio(Price/Earnings ratio) and earning per share(EPS).
Earning per share is one way to measure the value of ṭhe stock. In earnings per share, the price of the stock is divided by earnings. For example, suppose a company’s P/E is lower than its peers in the industry. Low P/E makes it attractive because it is considered undervalued.
Earning per share depicts companies profitability. Investors are interested in companies with increasing earnings. Earning per share is also used to measure a company with others in the same industry. For example, if a company earns three times more than other companies, high EPS will attract investors.
What causes stock prices to change
Technical Factors:
You can use technical analysis to determine the price at which you should buy stock. Technical analysis can determine the supply and demand by looking at the history and other factors. Thus, the analysis can tell you why do stocks go up and down.
Economic factors:
Economic factors affect the price of a stock in a significant way. One of the most prominent examples is inflation. High inflation causes a decrease in the stock price because high inflation increases the cost of running a business. Thus, economics is one of the reasons why do stocks go up and down.
Trends:
The price of shares increases because there is a trend of increase. Investors buy shares when the price is rising and then sell shares when prices are falling. This strategy is called momentum investing. Trend influences the price to increase. Investors choose a stock based on market trends. This trading strategy is called relative strength. The trend is one of the major reasons why do stocks go up and down.
News and events:
Technical and other factors can be why stocks go up and down, but the effect of global events is much more than any factor. For example, during covid 19, There were more sellers regardless of the stock’s earnings and valuation. Similarly, when there is positive news, then there are more buyers, even if some stocks look overvalued. So news and events can tell you why do stocks go up and down.
Conclusions:
Even after evaluations and analysis, there are so many factors that affect the price of stocks. So you can’t exactly tell when and why do stocks go up and down. You have to dive deep to understand, which takes time. In the long run, the prices in the stock market are rising. Some significant factors that affect the price of stocks and shares are:
- Supply and Demand
- Events and news,
- Technical analysis
- Economic factor
- Trends
- Stock valuation
These factors can help you to predict the selling price and the price movement of the stock. More aspects can help you to predict the stock price movement. The best approach is to diversify your portfolio than relying on one stock because it will help you smooth out your portfolio and decrease the bumps in your trading journey.
