Why do stock prices change?

There are many reasons why a stock’s value can go up and down. For starters, company performance will affect the value of the company, and therefore the value of the company’s stock.  When a business is successful, the value of its stock typically rises.

But another factor affecting a stock’s value is supply and demand.  When more investors like a company, demand drives the price of its shares up. On the other hand, when more shareholders want to sell, the price falls. This is the law of supply and demand in action.

Sometimes demand is rational, for example, if a company invents a faster, cheaper way to stream video, or a top stock analyst recommends the company.  Conversely, demand for a stock could drop if the company reveals unexpectedly low earnings in their quarterly report.

Supply can change when a company buys back some of its own stock, or splits the stock. Analysts also look at inflows and outflows, which refers to how much money confident investors are pouring into a company by buying stock—or whether frightened investors are selling.

But sometimes investor sentiment is based on intangibles, like fear. If there’s bad news for an industry—say, an industrial oil spill at sea, threats of a trade war, or other geopolitical events—the stocks of even tangentially related companies might take a hit.  In the worst case, when you add in the rise of algorithmic trading, in which huge blocks of shares trade within nanoseconds, you can see how even small market shifts can quickly turn into major events.