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What causes stock prices to change

Stock prices change every day by market forces. This means 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. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people want to buy or sell a particular stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this question, as just about every investor has their own investment ideas and strategies.

The value of the company

The principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't confuse a company's value with its stock price.

The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. So, a company that issues 1,000 shares at $100 per share ($100,000) has a greater value than a company that has 100 shares outstanding at $500 ($50,000).

To further complicate things, the price of a stock doesn't only reflect a company's current value–it also reflects the growth that investors expect in the future.

The company's earnings

The most important factor that affects the value of a company are its earnings. Companies with shares outstanding (public companies) are required to report their earnings four times a year (quarterly).

The stock markets watch these quarterly reports very attentively, because analysts base their future value of a company on their earnings projection. If a company's results are better than expected, the price jumps up. If a company's results are worse than expected, then the price will fall.

And all the rest

It's not just earnings that can change the sentiment towards a stock. Stock exchanges would be rather simple if this were the case!

Investors have developed literally hundreds of these variables, ratios and indicators to try and measure market trends. Some are simple, like the P/E ratio, while others are extremely complicated (such as Chaikin Oscillator or Moving Average Convergence Divergence).

Some analysts believe that it is possible to predict how stocks will change in price while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know as a certainty is that stocks are volatile and can change in price extremely rapidly.

The stock market is also sensitive to world events. Major occurrences like the BP platform explosion in the Gulf of Mexico in 2010, the 2011 earthquake in Japan or the public debt crisis in Greece have had major impacts on stock prices. Shifts in raw material prices and the publication of employment and industrial production statistics also have impacts, because they are indicators of economic health.

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