The stock price fluctuates due to the dynamics of supply and demand for it, which are motivated by the reports of the company, news, technical indicators and mood of the crowd.
The reasons for fluctuations in the share price at the low-lying level are supply and demand. The demand exists, when traders and investors want to buy cheaper and then to sell more expensive, expecting growth in share prices. And supply appears when investors and traders are waiting for the fall, and want to sell more expensive (and then to buy cheaper). This constant struggle between those who are waiting for growth (bulls), and those who are waiting for the fall (bears) is, in fact, the driving force behind stock price changes.
But understanding of the causes and origins of the change of supply and demand forces is much more difficult than the above basics of economic theory. In order to understand why the quotes change, it is necessary to understand why investors and traders change their expectations about the issuing company.
Why do supply and demand (and prices) change
The company’s profit
Perhaps one of the most powerful reasons for fluctuations in the share price is the profit of the issuing company. When the joint stock companies publish financial reports, stock market immediately reacts to the declared performance.
If profits exceeded expectations of traders, investors and analysts, the market participants are responding positively. They understand that, most likely, this information about the company will raise interest rates, and therefore buy in order to sell more expensive. These bulls raise the share price even higher with their behavior.
But on the other hand, if in the report of the company the profit was below expectations of analysts and traders, everything happens exactly the opposite: the entire market understands that the interest in this particular stock falls and therefore the price will fall.
As a result, everyone is starting to sell at the current price, in order to buy back cheaper later (or just remove the profit and fix the loss). Thus, bears push rates even lower.
Psychology as a reason for the price change
The stock market is very appropriate to the concept of self-fulfilling prophecy. Also, such phenomenon can be described with the following words:
Everything was fine, and then all began saying that everything is bad, and things got bad.
That is, if the majority suspects that the price would drop, then they start to sell, thereby moving the price down, and traders themselves directly exercise their suspicions. Conversely, if someone influential says that all will be well, he is believed, and begin to buy, thereby realizing the forecast.
Such schooling behavior of the crowd in the market explains the phenomenon when the market capitalization of the company (i.e., the share price multiplied by number of shares) does not substantially correspond to the real value of assets.
When traders expect from the acclaimed company something new and interesting (often in the scientific and hi-tech areas), they are with their expectations pushing the price up, though this price is supported by nothing but psychology. Over time, of course, everything falls into place, and the price falls, but nevertheless such phenomena occur, which means that the psychology and expectations of traders are a strong reason for fluctuations in stock prices.
Other reasons for the change of stock price. Analysis.
Analysis of security, perhaps, is a mixture between the first and the second reason for the price change, since it is based on the data, but also includes a psychological factor. When a significant proportion of the market players observes the formation of the figure “head and shoulders”, for example, they know that trend will reverse. They begin to act accordingly, thereby realizing their forecasts.
In addition to fundamental economic data from the news and financial reports of companies, analysts also use a variety of other technical indicators such as MACD, Zig-Zag, Stochastic, etc. These indicators form the expectations of analysts and traders which, in turn, push the price in a predicted direction.
The main causes of fluctuations in stock prices – financial reports, news and the expectations of market players, which are shown as supply and demand. Good performance pushes the share price up, and the bad – down. The expectations of the majority of traders and analysts are implemented.
That’s all for now. Got any questions? Just ask the expert!