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Friday, July 18, 2008
Why Do The Stock Prices Go Up And Down?
The rise donate old cars fall in prices of any product or for that matter any stock, depends upon zyban supply and demand of that product or stock. This is an elementary rule of the economics of price determination.
It must, however, be noted that while the demand and supply situation changes rather slowly in other markets, it changes fast in stock market. It changes in the twinkling of any eye.
We usually buy our household goods IRS trouble a rate over a certain period of time. Or, the prices of the items accident at work claims the menu of your favorite restaurant do not change as often as you visit it. They do change, but not as suddenly and rapidly as in stock market. This is one reason why stock trading is labeled as gambling, though it is not.
As said earlier, the prices in stock market change rapidly. In fact the fluctuation in prices is the only constant factor in stock markets. The process of quick changes in stock market prices is actually what makes the stock trading a unique, thrilling and an attractive preposition to the seasoned stock market traders. This fluctuation opens up a whole world for people to make profits in the stock trading.
If the stock markets were not volatile, they would probably not attract millions of investors worldwide and the numbers would not grow as phenomenally as they currently do.
The question arises: what makes the stock markets volatile or the prices of the shares change so fast while the prices do not change rapidly in other markets?
It is well known that the price of a share is determined by its supply and demand position. Price of a share is formed at a level at which the supply and demand match each other.
It must also be noted that a company has a fixed -limited- number of shares. The supply of shares can neither be increased nor decreased since the company's capital remains fixed and its corpus cannot be changed frequently.
If a company performs better or its future prospects brighten up, the demand for its shares will obviously increase. But since the number of shares is fixed, their supply cannot be increased to match the demand. In this situation, the price of the company's stock increases. The increase in price occurs in proportion to the perceived improvement in the performance of the company or its future prospects.
The reverse of this process is equally true. If the financial performance of a company dips, the demand of its shares falls and so does the price of its shares.
It hardly needs to be mentioned that most share holders are not involved in the affairs or the management of the company. They always look out for profitable bargains and the opportune time to buy or sell their stock holdings. So they enter or exit a company as refinance home mortgage as it suits them. The speed with which the traders enter or exit a stock is a reflected frequency of the change in the price of its shares.
Sometimes the demand for the stock of a company also rises or falls due to certain developments in the economy and industry in the country. This results in appreciation or depreciation in the price of its stock.
The stock market technology has advanced to such an extent that it keeps matching the supply with demand on second-to-second basis. The balance between the supply and demand constantly changes the prices of the shares.
As mentioned earlier, the price of a share is determined by the investors' perception of the value of the company's stock that they trade in.
The question arises whether the perceptions of the investors about the performance of a company change every minute resulting in the change in the price of its stock?
The answer is no. An individual investor formulates his perception on the basis of certain facts which do not change from minute to minute. Also the perception of one individual may not agree with that of another.
Moreover, if something untoward happens with the company that basically alters its financial prospects then the perception of all the investors will change collectively. This collective change in perception changes the price of a stock every second. A small disturbing or encouraging news flash about the performance of the company immediately affects the price its stock.
The change in investors' perception triggers buy or sell actions which in turn push the price up or down.
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Posted by ceiqabgli | 7:27 AM | E-mail this post 
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