How do stock prices change? Have you ever wondered about it? If you have interest in stock market you must have thought of it. Here you will get answer for what causes stock prices to change?
How do stock prices change ?
Let’s begin by asking how are stock prices determined?
How are stock prices determined?
We will illustrate with a simplified example.
Assume Reliance industries share is trading currently at 900.
There are few sellers who have bought reliance shares few days back at RS 800. Now they want to sell it to get their profit.
Seller wants to sell at 950. There is a buyer who is ready to buy at 950 because he thinks in few months share price will go up further.
Transaction happened at 950. Now the new share price is 950.
Seller wants to sell at 950. But buyer thinks 950 is too much for reliance share. But he can buy only if share is available to 850.
Since there is no buyer ready to buy at 950, seller decided to sell at 900. Unfortunately there is no one to buy even at 900. He saw there is buyer who can buy at 850. He thought for some time then sold to that buyer at 850.
Transaction happened at 850. Now the new share price is 850.
Every time a stock is sold, the exchange records the price at which it changes hands. If, a few seconds or minutes later, another trade takes place, the price at which that trade is made becomes the new market price, and so on.
Now come back to original question.
So how do stock prices change?
Ultimately how do stock prices change comes down to supply and demand.
It functions pretty much similar to any other market. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.
Understanding supply and demand is easy. What is difficult to understand is what makes people buy a particular stock and sell another stock.
Principal theory is that the price movement of a stock indicates what investors think a company is worth and it’s price movement going ahead.
Different people can interpret same situation differently. This is mostly because different investors invest for different time horizon. What might be good for long term investor can be bad for short term investor. Similarly the logic to buy and sell a stock is different for investor as compared to trader. Ref Investopedia.
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How do stock prices change – real time case
Majority of stock trades are made by professional traders who buy and sell shares all day long, hoping to profit from small changes in share prices. Since these traders do not hold stocks over the long term , they are not very much interested in term factors like earnings of a company or asset qualities etc. If a trader believes that others will buy shares (in the expectation that prices will rise), then she will buy as well, hoping to sell when the price rises. If others believe the same thing, then the wave of buying pressure will, in fact, cause the price to rise.
On the other side long term investors focus on the business and company in stead of stock price. Long term investors believe if the business will grow stock prices will also grow over the period of time.
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