The reason why the traders sit glued to their computer screens is that these pages reflect the changes in the stock prices almost sooner than they occur and these changes appear to occur faster than the heart beats of the traders. The price changes keep flashing across the screen changing the heart palpitation of the traders.
A question arises: what causes the changes in stock market prices.
A very simple answer is that the stock prices change as a result of the interplay of market forces of supply and demand. If more people wish to buy a stock than those who wish to sell it, the price of the stock rises. In other words when the demand for a stock is more than its supply, the price of the stock rises. Conversely, if more people wish to sell a stock and there are fewer buyers, the supply outgrows the demand and price of the stock falls.
It is very easy to understand the concept of supply and demand of a stock. What is difficult to understand is why people wish to buy a particular stock and sell another. This statement can be made in different words: What news is good or positive for a company and what news is bad or negative for it?
This apparently simple question evokes as many different answers as there are the investors. Every investor has his own ideas and strategies.
A broad consensus about the theory of price changes is that the price movement of a stock indicates what the investors feel about the worth of a company. It must be noted that you should not equate a company's value with the price of its stock. The value of a company is its market capitalization which can be calculated by multiplying the stock price with the number of shares outstanding. For example, let us say, a company has one million shares outstanding and the price of its share is $100, its market capitalization is $ 100x one million= $100 million.
There is another company whose stock trades at $50 and its shares outstanding are 5 million. Its market capitalization is $50x 5 million= $250 million. Obviously the value of the former company is lesser than that of the latter. The problem is, however, complicated by the fact that the price of the stock not only reflects the current value of the company, it also reflects the growth that the investors expect in the future.
The most important factor that influences the value of a company is its earnings. Earnings are the profit that a company makes over a period of time. It is quite natural for the investors to think about the earnings of the company whose stock they wish to invest in. Public companies report their earnings every quarter of a year. The report enables the analysts to determine the future value of the company on their earnings projection. So if the earnings of a company are higher than expected, the price of its stock goes up. Conversely if the earnings are poor, the price falls.
There is another scenario too that can change the sentiment towards a stock. During the dotcom bubble, the market capitalization of numerous internet companies grew into billions. The prices of their stocks grew, but the companies hardly made any profits. These valuations, therefore, did not hold much water.
All these examples prove that price changes are determined by numerous intricate situations which cannot be explained in well-defined terms.
Investors have developed their own theories about these variables, ratios and indicators. Nobody has so far provided any definite, reliable and abiding answer to the question why the stock prices change. The best course for an investor is to keep trading in stocks cautiously. You develop your own theory and intuition which helps you to trade successfully.
