Many different forces can affect stock prices, including company news and performance, industry performance, investor sentiment, and economic factors.
Stock prices are driven by a variety of factors, but ultimately the price at any given moment is due to the supply and demand at that point in time in the market. Fundamental factors drive stock prices based on a company's earnings and profitability from producing and selling goods and services.
By this we mean that share prices change because of supply and demand. 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.
No one sets a stock's price, exactly. Instead, the price is determined by supply and demand, like any other product or service. There's always a buyer and a seller with every transaction, but when a lot of people buy a stock, the price goes up.
The Securities and Exchange Commission (SEC) oversees securities exchanges, securities brokers and dealers, investment advisors, and mutual funds in an effort to promote fair dealing, the disclosure of important market information, and to prevent fraud.
Once a company goes public and its shares start trading on a stock exchange, its share price is determined by supply and demand in the market. If there is a high demand for its shares, the price will increase. If the company's future growth potential looks dubious, sellers of the stock can drive down its price.
In the short term, the stock price is driven by supply and demand, which can be influenced by sentiment, speculation, and hype. Meanwhile, a company's intrinsic value is based on its financial performance, balance sheet, and prospects.
The way you make money from stocks is by the selling them at a higher price than you bought them. For instance, if you bought a share of Apple stock at $200 and sold it when it reached $300, you would have made $100 (minus any taxes you'd have to pay on the money you made).
In other words, news that in a normal environment would lead investors to bid up stock prices, for example, is considered bad, driving prices further downward. Conversely, investors consider bad news as good, greeting signs of a slowing economy with increased willingness to take risk, driving markets higher.
The New York Stock Exchange (NYSE) is the largest stock exchange in the world, with an equity market capitalization of over 30 trillion U.S. dollars as of September 2024.
Rising Interest Rates
Higher interest rates usually reduce corporate profits and consumer spending, which can drag down stock prices. Rising rates also make bonds and other fixed-income investments more attractive, leading investors to shift away from stocks.
As mentioned, the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 are the three most popular U.S. indexes.
Generally, you want to see up weeks in higher volume and down weeks in lower trade. Also look for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down.
In the short term, stocks go up and down because of the law of supply and demand. Billions of shares of stock are bought and sold each day, and it's this buying and selling that sets stock prices.
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
Supply and Demand
In the stock market, supply is the number of shares people want to sell, and demand is the number of shares people want to purchase. If demand is high, buyers bid up the prices of the stocks to entice sellers to sell more.
The richest Americans own the vast majority of the US stock market, according to Fed data. The top 10% of Americans held 93% of all stocks, the highest level ever recorded.
Look for strong sectors and industry groups if you want to go long—that is, buy a stock with the expectation that its price will rise—and weak ones if you want to go short—which means borrowing and selling a stock whose price you think is going to fall, and then buying it back later at a lower price should it actually ...
Stock prices are determined by the relationship between buyers and sellers, and dictated by supply and demand. Buyers “bid” by announcing how much they'll pay, and sellers “ask” by stating what they'll accept. When they agree on an amount, it becomes the new stock price.
Price-to-book ratio (P/B)
P/B ratio is used to assess the current market price against the company's book value (assets minus liabilities, divided by number of shares issued). To calculate it, divide the market price per share by the book value per share. A stock could be undervalued if the P/B ratio is lower than 1.
We can calculate the stock price by simply dividing the market cap by the number of shares outstanding. Let's now think about why we can calculate it this way. The Market Cap (aka Market Capitalization) reflects the market value of the equity of the company.