How and Why Market Prices Change?

Money is made in the stock market mainly when you buy at a low price and sell at a very high price. Thus, the changes in value is your money made. Of course, there are other ways to make money in the stock market like dividends. But mainly here, I’ll be talking about the money made due to growth or changes in valuation.

Why do the stock prices change?

Before we go into how money is made, we’ve to know the reason the prices of these companies change. The simple answer is supply and demand or how much the investors think the company is worth i.e. if more people think the company is going to grow and want to buy more stock, the price will increase and vice-versa. Before I go forward I just want to make clear what a dividend is. A dividend is the part of the profits the company decides to share with the investors as a gift for investing in their company. Not all companies give dividends, some decide to invest these profits back into the company.

It is also wrong to equate the company’s value to the stock price. The total value of the company is the stock price of the company multiplied by the number of shares that are issued. A company has a given number of shares issued. These values are what the investors think the company will come upto in the future. Earnings are what the company makes as profits. And one of the main changes in sentiment of investors is caused by earnings. If the earnings are not as high as expected the price will fall and vice-versa. However this is not the only reason for change in sentiment. During the dot-com boom, many companies grew to billions of dollars just without any profits. To be straightforward, why prices change, nobody knows. Everybody just tries to make a very educated guess on how it’ll change in the future.

Some very important ideas from above:

• Market capitalization = number of shares issued x current price of the share price. No point in comparing the prices of 2 companies.
• Fundamentally, supply and demand causes change in price
• Many ways to explain change in stock price no specific way to predict the movements perfectly everytime.