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Why do stock market prices fluctuate?
Stock prices move up or down in order to match demand from buyers with supply from sellers.
Stock market prices move up and down all the time. But why? The secret to understanding share price fluctuations is to know that the stock market is a pricing machine designed to match buyers with sellers. If there are more buyers than sellers for a stock, prices rise to tempt new sellers. If there are more sellers than buyers, prices fall to attract extra buyers.
Of course, there are lots of different reasons why investors and traders might want to buy or sell shares. In this guide we’ll explain some of the common reasons why stock market prices rise and fall.
Why do stock prices rise?
Stock prices rise when demand for a share is greater than supply. This forces the stock market to raise the price to attract more sellers.
One of the main reasons why buyer demand increases is when investors think the company’s performance is likely to improve. This could mean rising profits, faster sales growth or simply new management with big ambitions.
Stock prices may also rise when the supply of stock is reduced. Sometimes a company will choose to buy its own shares to reduce supply and provide support for the share price. These share buybacks can also be used to help increase earnings per share.
A more extreme example of a stock price rise is when one company agrees to take control of another by buying all of its shares. Takeover deals are usually agreed at a share price above the current market price. When a deal is announced, the stock price of the target company usually jumps higher to match the takeover price.
Why do stock prices fall?
Share prices fall when supply is greater than demand. When that happens, prices fall to attract more buyers, so that the sellers can complete their trades.
One of the main reasons why a company’s stock price might fall is if its financial performance has disappointed investors. This usually means falling profits, but it might also mean that management have warned of tough times ahead.
Another reason why prices fall is when a company issues a large number of new shares in a placing or rights issue. This allows the business to raise new money from investors. This isn’t always bad news, but it can be a sign a company is facing a cash crunch.
What makes a stock price fluctuate?
The price of most stocks is based on the last completed trade (1). Most larger companies trade on an electronic market which automatically adjusts the price to match buyers and sellers. This means that each time a new trade is agreed, a company’s stock price can change.
For big companies like Apple or Tesco, new trades go through every second. That means the price is constantly changing, although each change is usually quite small.
Shares in small companies don’t usually trade so often. Their stock prices may be based on completed trades or on the prices being offered by investors who want to buy or sell the stock.
What causes a stock price to change?
Although stock prices are controlled by supply and demand, there are many reasons why investors might decide to buy or sell a share.
For example, if a company reports profits that are higher than expected, demand for the share might increase as buyers price in a sunny future. If a company’s performance is disappointing, sellers may push down the share price.
External news can also cause a stock price to change. For example, a major hurricane hitting the US coast could cause many millions of dollars of losses for insurance companies. The share prices of drinks firms in the UK fell when a new sugar tax on soft drinks was announced in 2016.
How can you tell if a stock price is going to fluctuate?
Predicting share price movements with certainty is impossible, but many investors have a tool kit they use to try and spot opportunities.
One of these tool kits is fundamental analysis. That means looking at a company’s financial performance and trying to estimate what the business is worth, and what will happen in the future.
Value investors like to buy shares in companies that look very cheap, in the hope they’ll rise. Growth investors often prefer to focus on companies that are expanding rapidly, even if their shares may look expensive today.
Technical traders take a completely different approach. They don’t pay much attention to fundamentals. Instead, they use charts and algorithms to look for patterns in share price movements and trading volumes. Traders aim to make profits by predicting share price movements based on statistical patterns.
What is an example of a stock price fluctuating?
The stock price of Meta Platforms, which owns Facebook, is an example of a share that’s fluctuated suddenly, in 2022.
Facebook’s share price doubled between March 2020 and September 2021. But on 3 February 2022, the Facebook stock price fell by 25% in 1 day. The crash came after the company’s quarterly earnings missed Wall Street forecasts and its average daily user count fell for the first time ever (4).
All of a sudden, investors started to panic that Facebook’s long growth streak might be coming to an end.
What influences buying and selling?
Stock prices can be affected by changes in company performance. But they can also be influenced by market sentiment.
If investors get excited about a fast-growing sector of the market, share prices can rise fast. This can lead to a boom. Unfortunately, this is sometimes followed by a bust, when investors take a critical look at their stocks and decide the future isn’t as bright as they previously thought.
Political and economic news can also trigger big stock market swings. Indeed, sometimes the market gets too emotional. Surprise news may trigger panic selling, followed by a quick recovery. The Brexit sell-off in 2016 (5) was a good example of this. Most shares bounced back within months (6) and the business performance of most companies was unaffected.
Why do stock prices change every second?
When a stock is heavily traded, its share price can change constantly as the market adjusts the price to match buyers and sellers. When this happens, a new stock price is recorded by the exchange and published every second.
When should you invest if a stock price keeps changing?
It’s impossible to be certain how or when a stock price will fluctuate. That’s why it’s important to have a clear strategy.
Long-term investors aim to profit from a company’s financial performance and growth potential over many years. For them, small stock price movements are less important. Their main focus is finding good companies that are reasonably valued.
On the other hand, short-term traders are often keen to scalp a quick profit on a stock before selling it and moving on to the next trade. This means they need to keep a close watch on stock price movements in order to monitor the progress of their trade.
Bottom line
Stock market prices move all the time in order to match buyers with sellers. Prices can be influenced by external events like natural disasters and by trading updates from individual companies.
The market mood can also change. Sometimes, the majority of investors are optimistic about the outlook and predict strong growth. This tends to lift share prices. Other times, investors take a more bearish view, pushing down stock prices.
The key to understanding stock prices is to have a clear strategy. Long-term investors can often ignore share price movements, as long as the companies they’re invested in are performing well.
On the other hand, short-term traders need to stay focused on stock market prices in order to try and capture quick profits.
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