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.
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Imagine there are 1,000 people willing to buy one share of stock XYZ for $10, but there are only 500 people willing to sell one share of XYZ for $10. The first 500 buyers each snag a share for $10. The other 500 buyers who were left out then raise their offer price to $10.50. This higher offer price persuades some owners of XYZ who didn't want to sell at $10 to sell at $10.50. The stock price is now $10.50 instead of $10 since that was the price of the latest transaction.
What affects stock price?
What affects stock price?
High demand for a stock drives the stock price higher, but what causes that high demand in the first place? It's all about how investors feel:
- Market sentiment toward the stock.
- Market sentiment toward the industry.
- Market sentiment toward the stock market.
- Confidence in the economy.
The more confident investors are about a company's prospects or the potential for positive developments, the more likely they are to want the stock. Conversely, a loss of confidence can lead investors to sell, pushing down the stock price.
Factors that can affect sentiment toward a stock include quarterly earnings reports beating or falling short of expectations, analyst upgrades or downgrades, and positive or negative business developments.
Demand for a stock can also be affected by sentiment toward a particular industry. An electric vehicle company, for example, may see its stock price soar as investors snap up shares because those investors are confident in the future of the EV industry. A rising tide can lift all boats.
This goes both ways. If investors sour on an industry, every stock in that industry could suffer -- regardless of how each individual company is doing.
Confidence in the stock market can also push up demand and prices for individual stocks. If investors believe that stocks are a good investment, either because valuations are attractive or because the stock market has been trending upwards, an increase in demand for stocks can push up prices across the board.
The opposite is also true. A declining stock market can zap investor confidence and lead to more selling and lower stock prices, and high valuations can prompt some investors to buy fewer stocks or sell their holdings.
Opinions about the trajectory of the economy also play a role in setting stock prices. Investors may sell some stocks in anticipation of an economic slowdown. The widespread belief in a recovering or booming economy, on the other hand, can lead to an increase in demand for stocks.
Definition Icon
Pattern Day Trader
The Financial Industry Regulatory Authority, or FINRA, defines day trading specifically as buying and selling the same security on the same day in a margin account.
Why do stock prices change every second?
Why do stock prices change every second?
Stock prices are driven up and down in the short term by supply and demand, and the supply demand balance is driven by market sentiment. But investors don't change their opinions every second. So why, then, do stock prices change so fast?
The current stock price is nothing more than the price at which the last transaction took place. For many stocks, transactions are occurring every second the stock market is open.
Investors trade an average of 90 million shares of Apple (AAPL 0.24%) each day. Every time a block of shares is bought and sold, the stock price changes to reflect the latest transaction price. The sheer number of transactions ensures that the stock price fluctuates every second, even if there's been no change in market sentiment.
The big picture is what matters
The big picture is what matters
Long-term investors, like those of us at The Motley Fool, don't much care about the short-term developments that push stock prices up and down each trading day. When you have years or even decades to let your money grow, analyst reports and earnings beats are often fleeting and irrelevant. What matters is where a company will be five, 10, or 20 years from now.
In the long term, the value of a stock is ultimately tied to the future cash flows generated by the company. Investors who believe a company will be able to increase its earnings in the long runor who believe a stock is undervalued may be willing to pay a higher price for the stock today, regardless of short-term developments. This creates a pool of demand undeterred by day-to-day news, which can push the stock price higher or prevent big declines.
While a lot of ink is spilled about daily fluctuations in stock prices, and while many people try to profit from those short-term moves, long-term investors should be laser-focused on a company's potential to increase its profits over many years. Ultimately, rising profits push stock prices higher.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
FAQs
If there is a lot of demand for a stock, investors will buy shares quicker than sellers want to get rid of them. This can move the price higher. On the other hand, if more investors are selling a stock than buying, the market price will drop.
What makes the stock market go up and down? ›
Stock prices change everyday by market forces. 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.
What determines a stock price going up or down? ›
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.
What is the Motley Fool's strategy? ›
The Motley Fool's approach to investing prioritizes buying and holding quality stocks for long periods of time. We focus the most on the business fundamentals of the companies in which we invest, rather than on their stocks' short-term price changes.
What is the Motley Fool's philosophy of investing? ›
The Motley Fool steers investors away from the allure of short-term gains. Their philosophy advocates for a long-term perspective, recommending holding stocks for at least 5 years, ideally for a 10- to 25-year timeframe.
What is the 3 day rule in stocks? ›
The 3-Day Rule in stock trading refers to the settlement rule that requires the finalization of a transaction within three business days after the trade date. This rule impacts how payments and orders are processed, requiring traders to have funds or credit in their accounts to cover purchases by the settlement date.
What is the best time of the day to buy stocks? ›
The opening period (9:30 a.m. to 10:30 a.m. Eastern Time) is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time. A lot of professional day traders stop trading around 11:30 a.m. because that is when volatility and volume tend to taper off.
How do you know when a stock is going to go up or down? ›
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. It tells you momentum is halting.
What is the algorithm for stock prices? ›
The LSTM algorithm has the ability to store historical information and is widely used in stock price prediction (Heaton et al. 2016). For stock price prediction, LSTM network performance has been greatly appreciated when combined with NLP, which uses news text data as input to predict price trends.
What raises and lowers stock prices? ›
Political issues, economic concerns, earnings disappointments and countless other reasons can send stocks lower or higher. But over the long term, stock prices will be driven by just a handful of fundamental factors such as earnings growth and changes in valuation.
The Motley Fool Rule Breakers newsletter focuses more on high-growth stocks in emerging or relatively new markets. The Motley Fool Stock Advisor service focuses more on growth stocks in established markets with lower volatility. Today, we are here to talk about the Motley Fool Rule Breakers newsletter.
What is the foolish four investment strategy? ›
The Foolish Four is a simple and proven system based on picking beaten-down Dow giants that are most likely to rebound. This strategy has averaged a return of 22 percent over the past 25 years.
What is the magnificent 7 stock portfolio? ›
Shares in just seven companies—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, known collectively as the “Magnificent Seven”—have accounted for a significant portion of the U.S. equity market's return in recent years.
What does Robert Kiyosaki say about investing? ›
Why Kiyosaki Prefers Hard Assets Over Cash. Kiyosaki prefers hard assets like silver over financial ones like the U.S. dollar for several reasons. He thinks it makes no sense that people cling to cash because it constantly loses value — not in the currency markets but due to inflation and rising deficits.
What does Warren Buffett say about investing? ›
He believes that the most important quality for an investor is temperament, not intellect. A successful investor doesn't focus on being with or against the crowd. The stock market will experience swings but Buffett stays focused on his goals in good times and bad.
Why is the stock market fluctuating so much? ›
The law of supply and demand holds true as in any market. Some factors, such as the rate of inflation, have the power to move the market as a whole higher or lower. Other factors, such as corporate earnings, may move a single company or an industry sector.
Why do market prices go up and 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.
Who controls the stock market? ›
Securities and Exchange Commission (SEC) | USAGov.
