Today we will understand why stock price changes frequently i.e. on daily basis.
Let us make an analogy of stock market to the game of Tug of war. Yeah, you heard it right! The stock market is like a game. It has 2 types of teams one is the buyer and the other is the seller. When both of these teams exert equal pressure, then the stock price more or less remain the same. If buying team becomes stronger and grows in size then opponent(sellers) starts losing and the stock price starts increasing.
The stock market could also be understood by the concept of demand and supply. If investors are over-enthusiastic about the company then they will the increase in demand and eventually stock price increases.
Now a question should come to your mind, why does 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.
This is a very important question. We know that no one can predict the future but we humans still have a habit of predicting or speculating on future events or rewards. Let us understand this with a very simple example. Let’s 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 the 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 on a future event which is yet to happen.
Any speculations tend to change stock prices on the daily basis. There are many intraday traders who take advantage of these speculations and their action also causes the change in the stock prices.
Why should one even invest if stock prices change on speculations?
One should invest in any company to create wealth. But if you are investing in a fundamentally sound company which keeps on posting good results, you should verify the same by studying the company’s 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 the company’s actions and its results determine the stock prices.
Thanks for reading.