A stock price is determined by the bid and asking price. If someone is willing to buy the stock at the asking price the trade is made. However, if no one is willing to bid at the asking price, then no trades are made. This will cause investors to consider changing the bid and asking amounts. This causes a fluctuation in the stock prices. The price of a stock can change numerous times throughout a day and there are thousands of reasons why investors may change a bid or asking amount causing the volatility of the market to change.
Some of the reasons stock prices increase or decrease are discussed below. These can be self-inflicted, political, investor opinions, company growth, etc.
If new quarterly financials have been released showing that a company has had an excellent quarter and those cause a stock to outperform what was estimated, the stock may see a nice rise in price. Big earnings have to happen in order for a stock to see a nice jump in price, because more often than not companies do not outperform what was estimated. However, quite the opposite can occur if financials show that a company has seen a large loss. Although companies can see profits without a rise in stock price, you hardly ever see a company loss earnings without a drop in price.
2. New Products/Losing Products
New products can be a huge driver for stock prices. The announcement of a huge new product for a company may bring in extra income; therefore, the stock price will go up. Product upgrades, such as new iPhones can cause the same effect for Apple. A new drug approval by the Federal Drug Administration could cause a nice increase for several pharmaceutical companies. On the other hand, losing exclusive product rights or patents to a product can cause serious damage to a company’s stock. When a company has exclusive rights to a product, they tend to have a monopoly making their company a high dollar investment for stockholders. As soon as those rights are gone the stock price will decrease. For example, if a pharmaceutical company loses its exclusive rights to a drug, its stock price will no doubt diminish.
3. New Regulations
New regulations or laws can end up positively affecting companies, for example sales tax increases. Retailers are sure to see an increase to their bottom line because of a new regulation such as this. This
could cause an increase in stock price. This exact same law could be detrimental to online retailers if
sales tax was implemented to online purchases. On the opposite side, this could cause a decrease in stock price to those online retail companies.
4. External Events
There are all kinds of events that happen around the world that can indirectly affect a company or industry. Interest rates, natural disasters, political affairs, etc. Each of these can affect stock prices. Some may be worse than others. A new President could cause damage to a sector or industry, but a catastrophic event could be detrimental to the entire stock market because investors may be less willing to take chances. Investments may be put on hold causing the entire stock market to see a decline.
These are just a few of the events and reasons that stock prices tend to rise and fall. This happens every day for varying reasons. Managing your stocks can be a cumbersome task because of the ever changing stock prices. However, you can start small by investing with your spare change using Acorns portfolio management. Click here to learn more and make the leap while you continue your education into the stock market.