Thursday, 18 April 2013

Why Stock/Share prices fluctuate?

Many of us go online each day to search for the latest share prices on stock market websites. Have you ever wondered why we need to this from time to time? It is just because the share/stock prices keep on fluctuating all day long. The share price which you have seen at the start of the day (opening share price) may not be the same, when you see it at the end of the day (closing share price).

So, what’s the actual reason of all these fluctuations/variations in the share prices, which is affecting all the stakeholders? The best answer to this lies in the simple economics rule of supply and demand. This rule states that, whenever there is high demand and low supply, the price will go up. On the contrary, when the supply is more and demand is less, the price will go down. Therefore, when there is high demand for a stock supply is scarce, the share price goes up. And conversely, when more people are selling a specific stock (the supply goes up), and if the market demand is not proportional to that supply, then the share price will go down.

Now, the important question is why people want to buy or sell a specific stock? There are many answers to this question. News on electronic and print media promotes or demotes fame about a specific company. If people see, that a company share prices are going down and they can lose money in future, they start selling their shares to prevent the potential loss. On the other hand, if they see a rising trend in share prices then they might sell those shares to avail the profits right away. However, there are two aspects a shareholder is considering, while buying and selling shares:

1.Capital growth (in terms of total market price of the shares)

2.Dividends ( the profits company distribute to shareholders on quarterly, semi-annual and annual basis)

The shareholders who are consider to hold shares for long term don’t indulge themselves in the short term fluctuations (ups and downs) in the share prices. They don’t sell the shares as they are looking at the bigger picture. They will retain the shares for long term; as if the company is doing well, they will get dividends and also increase in share capital. However, there are short term investors who sell their shares as soon as they see share prices go up to avail the profits. The fear of future downfall in share prices drives them to sell their shares today.

The shareholders make their forecasting/estimates based on share price history of a company. Many financial service companies are always there to provide their services to the clients. These companies specialize themselves in providing advice about when, where and how to invest.

There could be many other reasons for ups and downs in the share prices like market factors and internal company performance issues. However, the most obvious reason for share price fluctuations is the market news and supply & demand principle.

In general, nobody can predict the accurate future share prices, however the best investors can do is to forecast using various financial tools. The people who are the best at forecasting are rich and make most of the money out of this industry.

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