Who Sets Stock Prices: Everything You Need to Know
Many people follow the ups and downs of the stock market, but very few actually know anything about who sets the stock prices.3 min read
Who sets stock prices? Many people follow the ups and downs of the stock market, but very few actually know anything about who sets the stock prices. There are many factors to consider when evaluating the ups and downs of the stock market.
How Stock Prices Are Set
Stock prices are constantly changing daily because of fluctuating market forces. Stock prices are essentially a supply and demand calculation. Financial earnings and current economic trends can also influence this process. Large corporations' financial reporting statements can also affect stock prices. Other factors include:
- High demand/low supply: In this market, the price of stocks will increase to a point until buyers estimate the demand is leveling out.
- High supply/low demand: In this market, the price of stocks begins to decrease until it reaches a price that is appealing to buyers, thus creating more demand.
- Supply/demand balance: A supply/demand balance refers to a time when stock prices are acceptable to most. Both buyers and sellers accept the cost of current stocks. Stocks can remain balanced for months, usually until a significant financial event affects the supply and demand balance.
This cycle continues repeatedly, leading to a rapidly changing stock market. Other factors can also influence stock prices, such as a buyer's evaluation of a company's worth. If a buyer has a strong belief in a company's ability to earn profits, he or she is more likely to buy into that stock at a higher price. Additionally, investors are less likely to buy stocks of companies that they do not believe will be profitable in the future.
Investors often look at the following components of a business when deciding a stock's worth:
- The overall business success outlook.
- The current and expected financial prospects of the company.
- Where current stock prices are at when compared to traditional norms.
- Personal beliefs as to a company's worth and value.
Interest Rates and Stock Prices
Interest rates can also affect stock prices. As interest rates increase, stock prices decrease. This is due to the fact that increasing interest rates often mean a slower economic period is upcoming. Additionally, increasing stock prices often lead to investors leaving the market in pursuit of other more interest-friendly opportunities.
Decreasing interest prices, on the other hand, lead to an increase in stock prices. The lower interest rates attract investors to the stock market, thus affecting the supply and demand pattern.
Defining a Bull and Bear Market
The stock market is considered volatile because there are no set rules as to what causes an increase or decrease in stock prices. It is largely based on investor's considerations about a business and its stock future. While you might expect that rising stock prices would result in fewer investors, this is not always the case.
An increase in some stock prices can also increase investor attraction, as investors attempt to buy into the hype and then sell at an increased price. This is often known as a bull market. However, this hype eventually evens out and the stock prices begin to fall again.
As stock sales drive down the cost of stock prices, many investors panic, and this leads to a decrease in the overall value of the stock. This is known as a bear market. In actuality, a company's value cannot be calculated based on the stock market because of the many varying price contributors.
Evaluating the Value of a Company
There are more accurate ways to evaluate the value of a company:
- Market capitalization: This number refers to the stock price multiplied by the number of currently outstanding shares.
- Company earnings: This is perhaps the most accurate way to measure a company's value. Earnings are considered to be the profits earned. Companies that are publicly traded are required to report their earnings every quarter.
- Other methods include the P/E ratio, the Chaikin Oscillator method, and the Moving Average Convergence Divergence (MACD).
While there are many methods of calculating a company's value and the expected stock prices, none of them is a guaranteed way to predict the stock market.
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