Today we will understand why stock price changes frequently i.e. on daily basis.
Let us make an analogy of stock market to a Tug of war game. Yeah, you heard it the right stock market is like a game. It has 2 types of teams one is the buyer and another one is the seller in the market. When both of these 2 teams exert equal pressure than stock price more or less remain same. If one team becomes stronger and increases in size then opponent start loosing and the stock prices start decreasing.
The stock market could also be understood as the concept of demand and supply. In case investors are over-enthusiastic about the company then they cause the increase in demand and eventually stock price increases.
Now a question should come to your mind, why do any team become stronger or weaker?
The answer lies in the sentiments and behaviour of investors. Investors are playing the tug of war game and whenever they become greedy or optimistic then they move on to buyer’s team and stock prices eventually rise. The opposite happens when investors become fearful or pessimistic about the growth of the company.
How investors become optimistic about any company within a short time?
This is the very important question. We know that no one can predict future but we humans still have a habit of predicting or speculating future events or rewards. A very simple example will say an FMCG company made an announcement that they will be opening 20 new stores across the country. It was well known that the company was growing very fast over last 1 to 2 years. But as soon as the company made that statement investors become greedy and more optimistic about the company. As the result they start buying shares of the company. You should note that the company has not yet started any new store. They have neither increased their profits or revenue since their last announcement. All investors did is speculating a future event which is yet to be implemented.
Any speculations tend to change stock prices on the daily basis. There are many intra-day traders which take advantage of these speculations and their action causes the change in the stock prices.
Why should one even invest if stock prices change on speculations?
One should invest in any company because you know you are investing in a fundamentally sound company which will keep on posting good results. You have verified the same by studying companies financial statements and their management’s growth strategy. Speculation does change stock prices on the daily basis but on a long run no speculation works. Only company actions and its results determine the stock prices.
Thanks for reading.