Why do Stock Prices Fluctuate?
The stock market is an easy and quick way to make your wealth multiply. People are afraid to begin trading because of the constant fluctuations of the market. The main goal of trading on the stock market is to buy stocks and sell them at a profit.
Stock market prices are affected by demand-supply economics. When the demand for a stock exceeds supply, there will be a rise in the price of a stock. The more drastic the demand-supply gap, the higher the price. For example, when many traders are buying stock X, stock X's price per share will increase and the same is true vice-versa. When experts refer to market risks they are referring to this falling and rising demand and supply.
What factors cause stock prices to fluctuate?
People invest long-term in a company that is making good profits and attracts more investors which causes its share price to rise. Companies listed on the stock exchange have to declare their earnings every quarter and annually in an Earnings Report or Quarterly Report wherein you can check whether the company's earnings have met or exceeded projections.
A company that reports good growth per share will automatically experience more demand. However, if the company's earnings have failed to meet projections or if the company has earned less than what it was projected to earn, it's share price will most likely fall.
Good news or bad news
If the company reports an interest hike or if it acquires another company or breaks into a new market, it is considered to be in good financial health which results in a stock price hike. Similarly, a company that has to sell part of its stake, let go of employees or close down branches will experience financial struggle or a downturn in its earnings.
People will tend to sell such stocks for fear that the price of its shares will be driven down drastically or worse, that the company might close down, rendering the shares worthless. Changes in government policy and important financial events such as the annual budget might also affect the prices of stocks in industries affected by these announcements/events.
Overvaluation and Undervaluation
Undervalued shares prices might be rendered worthless when the company reports bad news which results in people dumping stock. Some expert traders watch for moments of undervaluation and try to buy in at this time because they make a calculated guess that the company will perform better shortly which will lead to an increase in demand. They are hedging on the resulting share price rise delivering profits.
Similarly, an assumption that a company will perform well in the future results in a rise in its share prices. For instance, dot-com companies got listed on the stock exchange, overspent shareholders’ money, did not deliver on projections and several eventually closed down, resulting in losses to those who had bought their shares.
Understanding the factors that push stock prices to rise or fall is very important to get your trading account and demat account to navigate the stock market. On trading platforms such as IIFL, you can open an online trading account and get access to world-class technological platforms that help you track the ups and downs of the share market and make an informed decision.