102-23 Stock Price: How are stock prices determined? What makes them change?

The difference in supply and demand is what determines stock prices. Many factors change the market supply-demand in stocks, including sales, profits, revenues, and outlook.

What causes stock prices to change?

Many factors can cause stock prices to change, including earnings reports, news events, and speculation. Earnings reports are releases of a company’s financial information that can cause a stock price to rise or fall.

News events are any events that have the potential to impact a company’s stock price, such as lawsuits, natural disasters, or political changes.

Speculation is when investors buy or sell a stock based on expectations of future price movements rather than the company’s current financial condition.

Course 102 - Stock Market Investing
Stock Price: How are stock prices determined? What makes them change?

How are stock prices determined?

The demand for a stock determines stock prices. Stocks can be in high demand due to increasing sales, revenue, and profits. Stock prices will decrease if stock demand is low due to profitability decreases or a poor future outlook.

Many factors influence stock prices, including the company’s earnings, dividends, and price-to-earnings (P/E) ratio. The P/E ratio measures how much investors are willing to pay for each dollar of earnings. A high P/E ratio means that investors believe the company will earn a lot of money in the future, while a low P/E ratio means that investors believe the company will not earn as much money in the future.

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How do exchanges control stock prices?

Stock exchanges play a role in setting stock prices but do not control them. Exchanges are markets where stocks and other securities are traded. They provide a place where buyers and sellers can collaborate to make trades. Exchanges use various methods to set stock prices, including auction-based and rules-based systems. The most well-known exchange in the United States is the New York Stock Exchange (NYSE).

What makes stock prices go up or down?

Stock prices move due to differences in supply and demand. The supply of a stock is the number of shares that are available for trading. The demand for a stock is the number of investors who want to buy it. When there are more buyers than sellers, the stock price goes up. When there are more sellers than buyers, the stock price goes down.

Exchanges use their methods to create an environment with equal buyers and sellers so that prices can be set efficiently.

Why do stock prices go down? Supply-side pressure

Stock prices can decline due to economic factors, the business climate, poor business results, or decreasing earnings. These factors cause supply-side pressure in the market, meaning more people sell than buy, and the stock price decreases. This is High Supply and Low Demand.

An example of why stock prices go down?

For example, a company announces very poor quarterly earnings and suggests a poor outlook. Investors who hold the stock suddenly realize that their money could be better invested elsewhere. They start to sell the stock at market price.

As the news of the company’s poor earnings gets digested, the buyers who were once interested in owning the stock suddenly start to back away from purchasing the stock. This causes a low demand for the stock. When combined with the high supply, the stock starts to plummet. The stock will fall to a point where the potential buyers start to feel the price is at a level where there is value.

Why do stock prices go up? Demand-side pressure

Stock prices go up because there is strong demand for the stock due to increased earnings, new business, new markets, new products, or increases in sales. These scenarios cause demand-side pressure, or High Demand and Low Supply.

An example of why stock prices go up?

For example, a company has just announced a record quarter and predicts a rosy outlook for the future. Those who own the stock are excited and expect to see the further appreciation of their investment. Those following the stock see this as a signal to start buying it.

Those who own the stock are reluctant to sell as they expect more price appreciation; this restricts supply. Therefore, those who want to own the stock are willing to pay more to entice further sellers into the market. This boosts the stock price significantly.

This gives you a good understanding of what makes a stock price move. But there are many more factors to stock price movements than earnings and positive outlooks.

Eight factors that cause stock prices to change?

  1. Investor sentiment and expectations
  2. Mergers and acquisitions (M&A) activity – Expected Takeover Target
  3. Industry strength – the industry itself is hitting a growth cycle.
  4. Market dominance – The company has developed a market dominance that it can leverage
  5. Competitor weakness – weak competition and failure of competitors in opening up new market share opportunities
  6. New product introductions – innovative product launches
  7. Analyst upgrades or downgrades
  8. Political or legislative changes that affect a company’s product or business model

Why do stock prices sometimes remain unchanged?

Sometimes, despite heavy trading in a stock, the prices can remain unchanged at the end of the day; this is called equilibrium. A balance of supply and demand causes a market equilibrium.

Normal Demand – Normal Supply

This scenario represents an equilibrium between buyers and sellers. This is when a stock moves sideways on a stock chart, neither trending strongly upwards nor downwards. There is no pressure on supply or demand in either direction. A stock chart shows an average volume day and muted price movements. If the market is overall up for the day, you might see some upward drift of the stock price; there will also be no important news that might sway the stocks or demand-supply in either direction.

Low Demand – Low Supply

This is a day in the stock market where we see disinterested buyers and sellers. Typical volatility is low, there is little movement in the stock price, and the volume bars are lower than normal.

High Supply – High Demand

In this scenario, we will see a significantly higher volume of trades. This means that the buyers are buying heavily, and the sellers are equally selling heavily. This means in a stock chart, we might see some change in the stock price in either direction, but we would see a huge volume bar. If you view candlesticks, you might see what is called a Doji.

How to see supply and demand for stock through the volume indicator

The best way to determine if a stock price will rise or fall shortly is to understand the relationship between stock price and volume.

Understand volume in stocks by reading our professional guide to stock volume.

Stock Volume Explained: Using 4 Top Volume Indicators