During the course of a single day, a stock can go up and down frequently. These changes supposedly reflect the changing demand for that stock (and its potential resale value) or changing expectations of a company’s profitability. But this seems too vague to me. How can these factors be so volatile? Who actually decides, or what is the mechanism for deciding, when a stock price should go up or down and by how much?
—Joseph Balszak, Muskegon, Michigan
This article is from the May/June 2002 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org
This article is from the May/June 2002 issue of Dollars & Sense magazine.
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at a discount.
Let’s start with your last question first—how are stock prices determined? Shares in most large established corporations are listed on organized exchanges like the New York or American Stock Exchanges. Shares in most smaller or newer firms are listed on the NASDAQ—an electronic system that tracks stock prices.
Every time a stock is sold, the exchange records the price at which it changes hands. If, a few seconds or minutes later, another trade takes place, the price at which that trade is made becomes the new market price, and so on. Organized exchanges like the New York Stock Exchange will occasionally suspend trading in a stock if the price is excessively volatile, if there is a severe mismatch between supply and demand (many people wanting to sell, no one wanting to buy) or if they suspect that insiders are deliberately manipulating a stock’s price. But in normal circ*mstances, there is no official arbiter of stock prices, no person or institution that “decides” a price. The market price of a stock is simply the price at which a willing buyer and seller agree to trade.
Why then do prices fluctuate so much? The vast bulk of stock trades are made by professional traders who buy and sell shares all day long, hoping to profit from small changes in share prices. Since these traders do not hold stocks over the long haul, they are not terribly interested in such long-term considerations as a company’s profitability or the value of its assets. Or rather, they are interested in such factors mostly insofar as news that would affect a company’s long-term prospects might cause other traders to buy the stock, causing its price to rise. If a trader believes that others will buy shares (in the expectation that prices will rise), then she will buy as well, hoping to sell when the price rises. If others believe the same thing, then the wave of buying pressure will, in fact, cause the price to rise.
Back in the 1930s, economist John Maynard Keynes compared the stock market to a contest then popular in British tabloids, in which contestants had to look at photos and choose the faces that other contestants would pick as the prettiest. Each contestant had to look for photos “likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.” Similarly, stock traders try to guess which stocks other traders will buy. The successful trader is the one who anticipates and outfoxes the market, buying before a stock’s price rises and selling before it falls.
Financial firms employ thousands of market strategists and technical analysts who spend hours poring over historical stock data, trying to divine the logic behind these price changes. If they could unlock the secret of stock prices, they could arm their traders with the ability to always buy low and sell high. So far, no one has found this particular holy grail. And so traders continue to guess and gamble and, in doing so, send prices gyrating.
For small investors, who do hold stock for the long term and will need to cash in their stocks at some point to finance their retirements, the volatility of the market can be a source of constant anxiety. Every time a share in, say, General Electric is traded, the new price is used to revalue all outstanding shares—just as the value of your home appreciates when the house down the block sells for more than a similar house sold last week. But the value of your home wouldn’t be so high if every house on your block were suddenly put up for sale. Similarly, if all ten billion outstanding shares of General Electric—or even a small fraction of them—were put up for sale, they wouldn’t fetch anywhere near the current market price. Small investors need to keep in mind that the gains and losses on their 401(k) statements are just hypothetical paper gains and losses. You won’t know the true value of your stocks until you actually try to sell them.
Ellen Frank teaches economics at Emmanuel College and is a member of the Dollars & Sense collective.
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FAQs
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.
Who determines the actual stock price? ›
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.
Who set the price in stock market? ›
The price is set based on valuation and demand from institutional investors. After the initial offering, the stock starts to trade on secondary markets -- that is, stock exchanges such as the New York Stock Exchange (NYSE) or the Nasdaq. This is where we get into the market being a voting machine.
Who actually changes the stock price? ›
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.
Who is controlling the US stock market? ›
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.
Who controls the most money in the stock market? ›
Based on this estimate, the richest 10 percent of U.S. households own roughly $42.7 trillion in stock market wealth, with the richest 1 percent owning $25 trillion. The bottom half of U.S. households own less than half a trillion dollars in stock market wealth.
Who dictates share price? ›
Stock prices are dependent on the forces of supply and demand. If you're not familiar with these, it simply means that prices will rise when there are more buyers (demand) than sellers (supply). And they will fall when there are more sellers than buyers.
Who dictates market price? ›
In a competitive market, sellers compete against other suppliers to sell their products and buyers bid against other buyers to obtain the product. This competition of sellers against sellers and buyers against buyers determines the price of the product. It's called supply and demand.
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.
Who controls the stock market? ›
SEBI is the regulator of stock markets in India. It ensures that securities markets in India work efficiently and transparently. It also protects the interests of all the participants, and none gets any undue advantages.
Stock markets work as organized platforms where buyers and sellers come together to trade shares of publicly listed companies. At their core, these markets operate on the principle of supply and demand, with share prices fluctuating based on the perceived value of companies and overall market conditions.
Why do stocks always go down when I buy them? ›
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.
Can companies manipulate stock prices? ›
A common type of stock manipulation is the pump-and-dump, which artificially inflates the price of a microcap stock before selling it. Currency manipulation is a distinct political claim typically made in trade disputes between sovereign countries. Federal laws regulate the stock market.
What moves a stock price? ›
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.
Who fixes stock prices? ›
Stock prices are not fixed. The demand-supply dynamics of the market are responsible for the changes in stock prices. For example, if there is more demand than supply, the price will increase.
Are stock prices manipulated? ›
There are several ways of manipulating stock prices in the market. Deflating the price of a security can be achieved by placing a significantly large amount of small order at a price that is lower than the current market price of that security.
Does the government control stock prices? ›
Free markets are often conceptualized as having little to no interference from the government. However, in reality governments step in to stabilize markets, regulate transactions, provide institutional frameworks, and enforce rules around contract law and property rights.
Who controls the market prices? ›
Price controls are normally mandated by the government in the free market. They are usually implemented as a means of direct economic intervention to manage the affordability of certain goods and services, including rent, gasoline, and food.
