Why Do Stock Prices Go Up or Down?

Why go back to basics? Because only less than 1% of the Filipino population are investing. And it is presumed that almost half of that 1% are plainly putting in their money in financial instruments such as stocks without even knowing the basic principles and concepts of investing.

For the past two weeks, I have been receiving private messages from different people asking what makes stock prices move. The answer is simply because of supply and demand.

(Re)-Explaining Supply and Demand

Supply-and-demand

Supply is how much of something is available. For example, if you have 10 shawarma sandwiches, then your supply of shawarma sandwiches is 10. If you have 4 chocolate bars, then your supply of chocolate bars is 4.

Demand is how much of something people want. To know how much a demand is, you can use a very simple numbering system, just like the supply above. If 7 people want shawarma sandwiches, then we can say that the demand for shawarma sandwiches is 7. If 4 people want chocolate bars, then the demand for chocolate bars is 4.

Take note that shawarma supply is more than the shawarma demand. While the chocolate bars supply is just equal to the chocolate bars demand.

What’s The Relationship Between Supply and Demand?

To recap, supply is how much of something you have, and demand is how much of something people want.

The relationship between the supply and demand can be shown by using the price of something. On the whole, the price of something will go up if the demand goes up because the seller believes he/she can get more money for the product or service he/she is selling. And vice-versa.

Remember that these two market forces (supply and demand) are attached to people’s behavior and emotions.

When and Why Does Stock Prices Move?

When there are more people who want to buy stocks (demand) than investors who want to sell (that’s supply), then the price goes up.

Furthermore, the prices of shares go up when…

  • Companies’ businesses are doing good and are making huge profits.
  • A country’s economy is growing
  • People wants to buy lots of shares as they believe they will enjoy bigger profits later on
  • A lot of people just do not want to sell their shares
  • or, only few shares are left for sale in the market
  • there is hype

On the other hand, when more people wanted to sell stocks than those who wanted to buy, the supply becomes higher than demand which makes the stock prices fall.

This happens when…

  • Companies are experiencing losses.
  • The world and a country’s economy is not doing good.
  • Majority of the investing population do want to sell their shares.
  • Only few people want to buy shares.
  • A lot of shares are available in the market.
  • and other factors such as recession, inflation, interest rates, natural disasters, etc.

Will we ever predict when a stock price will change? Yes, and No.

Know the detailed answers to that question in my next blog post by subscribing to BurnGutierrez.Com for FREE.

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Photo credit: Supply & Demand WikiCommons