Q: Hi Alex. Why do stock prices go up and down so much?
Great question! When you own shares of stock, you’re likely hoping for their prices to increase; when stock prices go up, the shares become worth more. But if you’ve watched stock prices at all (or have seen some stock-related charts), you’ll know that’s not always the case. Sure, they do sometimes rise. But they also sometimes drop. They can even change drastically in a single day.
What causes these fluctuations? Well, there are a lot of potential reasons—but for the sake of starting somewhere, let’s talk about one of them: demand.
Think about how stock is exchanged. When someone wants to buy shares of stock in a certain company, they’re matched with someone looking to sell shares of stock in that same company. But what happens when the demand for a certain stock is high and there are more people wanting to buy than there are looking to sell? In cases of high demand, prices often go up, which may then convince more owners to sell.
It goes the other way, too. When there are more people looking to sell than there are wanting to buy (in other words, demand is low), prices will often drop, which may then entice more buyers.
Let’s talk about what drives demand for a stock.
A lot of factors can affect the overall demand for a stock and ultimately the stock price.
Some common ones: company news, earnings reports, economic news, analyst predictions, and investor sentiment (such as has driven the rise of “meme stocks”). When the news or predictions say good things about a company, more people tend to want to own shares of that company’s stock and fewer will want to sell. When there’s bad news? Chances are some folks will want to get rid of their shares and there will be fewer looking to buy it.
Some days, the stock market may drop.
There’s no one reason why stock prices can drop across the board very quickly. World events, economic turmoil, market sentiment (how shareholders feel about the stock market), among others, can all play a role. Sometimes there’s no discernible reason.
People often want to know if it is possible to predict stock price changes.
Sure. But there’s no guarantee those predictions will be accurate. While you can make educated guesses left and right, it’s impossible to know exactly how prices will fluctuate.
Uncertainty doesn’t have to keep you from participating in the stock market, and obviously we at Bumped believe that owning what you love is a good place to start.