How Stocks Get their Prices

It is understood by many that the stock prices go up and down depending on several factors including economic events, buy and sell volume, earnings, etc. however, this is simply incorrect. Stock prices are not directly affected by these factors. These factors only affect the supply and demand for a certain stock.

What really sets the price of a stock is its supply and demand. Bigger demands paired with low supply means higher prices while smaller demands and ample supply means lower prices. The factors such as the mentioned above affect the desirability of stocks.

For example a company’s earnings report is not so good. This effectively lessens the desirability of the company’s stocks because who wants to invest in a company whose profits are sloping downwards? The stock prices now have lower demand and thus bigger supply. In order for the stocks to still be bought and investments to keep flowing in the company, the stock prices go down.

This is the same case for companies whose earning reports have skyrocketed. Everybody wants in on the rise that’s why stock prices will now go up.

This is the everyday reality of the stock market. Buyers and sellers trade according to the supply and demand of stocks. Prices are discounted while others become more expensive. This delicate balance between the buyers and sellers, the supply and demand, and the market and the trader that dictate the value of a stock.