If you know the first thing about the stock market, you’re probably familiar with stock price volatility. Stocks going up and down in the blink of an eye can confuse inexperienced investors and discourage them from buying.
But that shouldn’t be the case because we’re here to answer some age-old questions and tell you what to look for when examining prices.
So, why do stocks go up and down? Let’s find out!
What Makes Stock Prices Go Up and Down?
The straightforward answer to this question is – supply and demand. However, that’s just the tip of the iceberg and not even close to the whole story. Although many factors contribute to fluctuations, we’ll examine what affects stock prices and explain how these impacts manifest, i.e. the fundamental and technical factors in play.
Going by the title, the fundamental factors are the primary influence affecting stock prices. However, they rarely appear in isolation. Instead, prices are usually determined by a combination of an earnings base and a valuation multiple.
The earnings base is one of the most important factors impacting stock prices because they represent the amount of money a company has gained or lost. Therefore, the higher a company’s earnings, the more it’s worth and vice versa. Here, we’ll be looking at earnings per share (EPS).
EPS is the owner’s return on investment, that is, the price an investor is willing to pay for a future stream of earnings. With a change in market value comes EPS variations, which further determine whether more investors are buying or selling a company’s shares.
However, these numbers also change frequently, as a company’s shares can decline to their lowest stock price and then experience a surge in a matter of days, depending on impactful developments in the market or industry.
The valuation multiple is a measure of how expensive a stock is. If a stock has a high price-to-earnings (P/E) ratio, it means that investors are willing to pay more for each dollar of earnings the company generates. This outcome can be due to future growth expectations or because the firm is seen as part of a stable, profitable industry.
As evidence of how much investors are willing to pay for perceived value, we’ll mention that the highest stock price in history is a mind-blowing $445,000 per share. The company, Berkshire Hathaway, reached this number because it’s the holding firm of billionaire investor Warren Buffet.
Meanwhile, analysts also consider many technical factors when looking at how the stock price is determined. We hand-picked those that have proven most influential in stock price fluctuations, such as exogenic events, inflation, economic environment, and market trends.
Exogenic events are global occurrences that might influence the stock price because they occur outside of the typical model.
Therefore, in times of great fear, such as wars, natural disasters, or pandemics, market trends might flunk, regardless of earnings or valuation. On the other hand, stock prices tend to trade up in happy times fraught with developments.
Unsurprisingly, inflation plays a significant role in stock market updates. Namely, when prices in the overall economy rise, investors may become concerned that the company’s profits won’t be able to keep up with the cost of living. Therefore, this can lead to a decline in the stock price as investors sell their shares.
Additionally, when interest rates rise along with inflation, it becomes more expensive for companies to borrow money, which can also lead to a decrease as the company’s future becomes unstable.
The economic environment can also have a considerable impact on stock prices. With that said, when the economy is doing well, investors are more likely to buy stocks as they expect the company to prosper in the future due to favourable conditions. Conversely, when the economy is doing poorly, investors tend to sell their stocks out of fear the company won’t make money.
It’s essential to keep an eye on factors like GDP growth, unemployment rates, competition, debt, and credit to gauge whether the cost of shares will change.
Market trends are another factor investors watch out for before buying stocks. When a particular market sector is doing well, investors will likely buy stocks in that industry as they believe it to be profitable. On the other hand, they will rush to sell their shares when a sector or market goes down because they expect the company to lose money.
Despite all these factors, it’s crucial to remember that stock prices are not always rational and can go up or down for seemingly no reason. Unfortunately, because of market volatility, it can be challenging to predict costs.
However, by understanding the fundamental and technical factors that drive prices and knowing the basic stock data, potential investors can make better decisions when buying or selling.
What Makes a Stock Price Go Up?
As we already mentioned, many factors can impact the price of a stock. But let’s take a closer look at what contributes to rising costs. We’ll disregard the obvious supply and demand and examine other underlying factors.
If you want to learn how to calculate a stock price yourself, you can make use of this handy stock calculator.
For the newbies, market sentiment measures how people feel about the market and their investments. Therefore, when the sentiment is positive, potential investors are drawn to buying stocks, but if it’s negative, they stay away. Moreover, market sentiment can be affected by the level of consumer confidence, the Dow Jones Industrial Average, and the news media.
You might be interested: 10 Best Stocks to Buy Right Now in Canada.
Confidence in the Economy
Investor confidence might cause the market to go up, meaning stock prices will also rise. This happens when longstanding investors develop loyalty to their holding companies, usually because they’ve received a generous return on investment. Then, other investors followed suit, and soon enough, the company has garnered supporters and witnessed a surge in share prices.
We already know the driving force of the media, so it’s no surprise that the news also has a hand in stocks going up. When a company is in the news for a positive event, it might pique the interest of some investors because it can look like an undervalued opportunity. In turn, this will cause their share costs to increase as more investors get in on the fun.
In conclusion, a large set of factors affect stock prices. Hopefully, our guide was able to answer questions like “Why do stocks go up and down?”, “How does a stock price change?” and “Which factors are at play when stocks go up?”.
With this knowledge in hand, you can make smarter decisions about investing your money.
The stock market typically opens at 9:30 am and closes at 4 pm EST.
A stock is a type of security that represents ownership in a company. When you buy a stock, you become a part-owner of the company.
You can buy or sell some stocks after hours, but this depends on the specific stock and the exchange it’s listed on, so make sure to check beforehand.
Volume refers to the number of shares of a stock traded during a given period. It’s typically measured in terms of how many shares are traded per day, week, or month.
Analysts determine the price of a stock by its supply and demand. If there is more demand than supply, the price will increase. On the other hand, if there is more supply than demand, the price will decrease.
There are a number of factors that can influence the movement of stock prices. Some of these include earnings reports, analyst ratings, company news, and global economic indicators.