What Causes Stock Prices To Change?
Since stocks are typically traded via stock exchanges, whether physical like the New York Stock Exchange, or virtual like Nasdaq, the price of a given stock will fluctuate throughout the trading day. While there are many factors at play when a stock price changes it all boils down to the principle of supply and demand.
A stock price will increase when demand outpaces supply, and a stock price will decrease when supply outpaces demand. So the real question we want to ask is; what factors influence the supply versus demand of a given stock?
Initially one might be tempted to think that the health of a company is the primary factor determining its stock price. For example a company that posts earnings in excess of predictions will likely see a rise in stock price while a company that posts a loss will likely see a decrease in stock price.
This is due to supply and demand. When a company is earning more than predicted more investors want that particular stock, thus demand will outpace supply, and the price will rise. Likewise, if the company is losing money less investors will want that stock, thus supply will outpace demand, and the price will drop.
While earnings are a primary factor in stock price they are not the only things that can cause a stock to decrease in price. If a company makes a decision that worries investors, like hiring a controversial CEO, it can cause fewer people to want the stock, thus pushing the price down.
Because stock exchanges work on an auction type model (NYSE) or a marker type model (Nasdaq) it’s possible for the price to rise or fall dramatically because of a perception of value. If a particular stock begins to sell very well, the price will increase causing more investors to want that stock, thus pushing the price higher and higher. Similarly, if investors start selling large quantities of a particular stock other investors will likely follow them so as to not lose money, thus driving the price of the stock down. In either of these cases the price of the stock may well be disproportionate to the actual value of the company.