Why Do Stock Prices Change

We say the stock market is volatile. The money pours in today and you can just as easily lose it all the next. That's why any sensible investor starts with a stock analysis. To do that though requires an understanding of what causes the ups and downs in share prices.

DEMAND AND SUPPLY

When we come down to the basics, demand and supply is what causes stock price fluctuations.

If there are not enough investors in a company, there will be of course a surplus of shares. This in turn leads to a significant drop in the value of the investment.

If however, there is a surge in demand, it would mean investors are buying, so the price of the stock would shoot up.

What it really boils down to though, is just how valuable people think the company is.

WHAT STOCK PRICE REFLECTS

Current Company Worth

How much money a company brings in is obviously an extremely important factor. If a business isn't doing well, it's hardly likely that an investor will choose to buy into it.

The company should have great past financials, which would lend certainty about its ability to perform in the future.

What investors think will happen

The company value isn't always the motivation for investors choosing to buy or sell. What it comes down to is peoples' perceptions, their influences, likes etc.

So what is it really that inspires either confidence or doubt about a company in the mind of an investor?

CHANGING SENTIMENTS

There are plenty of reasons for an investor to back out of an investment. Earnings can be affected by anything from social and political changes to internal affairs.

Internals –Over the course of time a company is likely to face a number of hurdles. Legal issues, changes in management, they're part and parcel of the corporate world. Though these new developments don't always end up hindering production, it's our reaction to change that causes the panic.

Government – When power changes hands, there's often a change in policies. This could mean a company having to pay higher taxes or end of sops previously granted, new regulations, etc. Either way investors get nervous when there's political uncertainty.

World events – With every day comes new global changes. Inflation, disasters and better technologies can make booming businesses redundant practically overnight. Unless a company is able to adapt to the changing times, it will most likely lose its ranking.

Although all the above are good enough reasons to make an investor jittery, it is the herd mentality trait in humans that contributes the most to the sudden ups in buying or selling. People hear of other investors decisions and figure it safer to follow the crowd, and so begins the downward stock price spiral.

AVOIDING THE RISK

While clearly it's hard to do a thorough stock market analysis, it isn't impossible to balance the risk. To do that though you must first consider if the company is solid and can withstand the odds.