Every day the market is open, and shares in the billions are bought and sold by investors and traders combined. The buyers and sellers who constantly transact in shares cause a stock price to move up and down.
What are some of the other reasons why stock goes up and down? Here’s an example to understand the movement of stock prices daily –
Imagine there are 100 people bidding for stock DSA at a price of ₹100 for one share. But on the other hand, there are only 50 people who are willing to sell at ₹100 per share.
The first 50 buyers will get the stock at the price of ₹10 but what about the next 50 buyers? They will have to bid a slightly higher price of, say, ₹105 per share.
The higher price persuades other sellers who didn’t want to sell at ₹100 to sell at a higher price of ₹105 per share. This pushes the stock price up, as it is now the last transacted value in the market.
The stock price of any company is determined by the buyer-seller meeting point, where the supply and demand for the stock moves its price every second.
What Moves The Stock Price Or What Causes Stock Price To Move?
The basic understanding of stock price movement is the volatility that every stock witnesses due to buyer and seller movement in the market.
Beyond that, it is difficult to determine the exact cause of why stock goes up and down. We can, however, mention some important factors that move stock prices.
Why Stock Goes Up And Down
When you have an interest in learning about the stock market, one intriguing question arises when you first glance at how the market works, which is – Why stock goes up and down?
In fact, it’s this fluctuation in price that keeps many investors and potential traders away from the markets. Whether you’re an investor or a trader, your goal is simple – buy low, sell high and book profits.
The only way that is possible is if the market is volatile enough to move stock prices. Apart from the buying and selling forces of the market, there are some other factors that move the stock price, mentioned below:
Factors That Move Stock Price
Some factors are controllable by the company – Their performance directly impacts the stock price in the market and is a direct cause of volatility.
Fundamental Factors
Here are some of the fundamental factors that move a stock price:
1. Earnings Per Share
Every owner who has shares in a company is entitled to its earnings. EPS refers to the earnings per share of the company.
Investors buy shares of a company partly because they believe that the future of the stock is promising and profitable. This belief in the stock’s potential is tied to how much investors are willing to pay for the stock today.
Shareholders will get these earnings in the future either as dividends, or bonus shares or will get reinvested into the company itself, which is a long-term benefit to shareholders.
If investors see the company having a very strong market presence in its industry in the future, there will be a strong demand for the stock.
2. Valuation – P/E Ratio
Another fundamental factor that moves a stock price is the valuation of the company. An undervalued stock will see a higher demand if the stock price/earnings ratio is below that of its industry and peers.
Combining that with a higher earning potential, the stock is assumed to be undervalued and sees a potential upside in the future.
On the other hand, we have overvaluation, where the company’s earnings do not justify its current market price.
When more investors realize that the stock is currently trading at an overvalued price, the stock will undergo a price correction, which usually means a fall in the share price until its price reaches a fair value.
Technical Factors
Now we’ve covered the fundamental factors to answer why stock goes up and down. Let’s take a look at some technical factors.
Technical factors can, directly and indirectly, affect the stock price, and it doesn’t necessarily imply that the company is responsible for these factors.
1. Economy
A growing economy is good for everyone, including the markets. Most established stocks will see good growth in profitability and sales growth, and that adds jobs to the economy and wealth for the shareholders.
A country’s economic growth adds to the growth of companies revenues. During times of economic crisis, recession, and high inflation, the markets are more likely to fall, irrespective of the company’s strong fundamentals and performance.
Government policy and budgetary spending also find their way into the stock price movement.
2. Company Related Events
Corporate actions and announcements of major events from the company also move the stock price. Besides releasing quarterly reports, they also provide estimates and predictions for their upcoming quarters as well.
Apart from the company, analysts from brokerages also give their expectations from the stock after research.
These estimates and predictions act as a threshold and if the company’s performance is below expectations, the shares will more than likely take a fall.
3. Liquidity
Established large-cap stocks such as Reliance and TCS have high liquidity, which makes the stock price susceptible to news and corporate action announcements. The same cannot be said about micro and small-cap companies with low levels of liquidity.
Well-known companies of scale have higher liquidity than small-cap companies. They are bought and sold regularly on the markets. The same cannot be said about small-cap stocks.
4. News
One major factor that cannot be avoided is the news. Information travels lightning fast now and it can directly affect stock prices if the announcement happens when the market is open.
Otherwise, the effect is reflected in the next trading session. There is no fixed measure to understand the full impact of news on the stock price movement, but it does have a notable impact.
Some examples of major news updates that can affect the stock price are – Mergers, acquisitions, quarterly reports, new products & services, business deals, etc.
Besides a specific company, other news updates such as the interest rate hikes by the RBI, annual budget announcements, capital expenditure, and other government announcements also have a significant impact on the stock market as a whole.
Also Read: 10 Best YouTube Channels To Learn Share Market in India 2023!
In Closing
The reason why stock goes up and down is tied to multiple reasons and is not controlled by any one specific factor. It depends on the type of investor as well.
Some investors focus on corporate actions alone while others look at financial statements for fundamental analysis. What are your theories on the stock price movement in the market? Let us know in the comments.
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