Value Investing

Why do Stock Prices Fluctuate?

Let us discuss why stock prices are constantly going up and down. Like any auction market, prices of stocks constantly rise and decline. The back and forth between buyers and sellers on how much the former is willing to buy the stock for and how much the latter is willing sell the stock at, will constantly cause the stock prices to fluctuate. Stocks are sold at places called ‘exchanges.’ An exchange is where traders buy and sell the shares of different companies.

Forces of supply and demand will begin to come into play. If there are several buyers of stock and fewer sellers of it, that stock will be deemed rare, and its price will rise. However if there are several sellers of those shares and fewer buyers, the price will decline. The fluctuations of the price of a shares has no direct relation with whether there is something wrong with the company, or whether there isn’t. It is merely the willingness of buyers to buy your shares. The price of a share may decline simply because no one is really interested. At a later date, those same share’s price may rise when buyers begin to gain interest in that company. It is the simple principle of supply and demand.

The investor vs the speculator

An investor is someone who carefully analyses a company, its earnings and financial forecasts, and its worth. An investor will not buy stock unless they are convinced that it is a good value investment. They make investment decisions based on factual data and calculated forecast. Often, the intelligent investor, like I am aiming to become, will analyze the company’s fundamentals before investing in its shares.

A speculator however is a person who will buys stocks for reasons other than careful investment decisions. They are ‘at play’ because they hope the value of the stock will rise and they will make a profit from the resale of the shares. Speculators buy without following the fundamentals and principles of investments. They make decisions on a whim and they are only interested in short the, profitability.

The importance of differentiating between investors and speculators is to be able to understand how these two business personalities can affect the price of stock. The investor usually evens out the market. One can deduce that an investor will usually be buying when a speculator is selling and will be selling when a speculator is buying.

That being the case, the investor balances out the price on the market. The speculator however, is usually the driver who drives stock prices to extremes. It would have been nice if everyone who traded on the stock market was an investor, rather than a speculator. This means that he prices by the value of the businesses, and no other ulterior motives. Stock markets would be a much more rational place. Probably less noisy too. However, that is not the case. Instead, the two exist but in the long run, one balances the other out.

In conclusion, Why do Stock Prices Fluctuate

Why do Stock Prices Fluctuate is simply following the forces of supply and demand regulated within the stock markets. To learn more about investing follow us on Facebook