If you are a beginning investor, you might wonder when it is a good time to buy or sell stocks. When attempting to understand why stock prices rise and fall it helps to understand the law of supply and demand.
The only thing that is certain is that stocks are volatile and can rapidly change in price. If an item or service is in short supply, people will pay more for it; if there’s an abundance, the price will fall. Whether you’re trying to get a ticket to the Super Bowl or trying to catch a last-minute flight during the holidays, the law of supply and demand comes into play. The hard part is comprehending what makes people like a particular stock and dislike another. To answer that you need to figure out what news is positive for a company and what is negative.
When a company releases news about a new product line or management change, be it good or bad, Wall Street and investors are sure to react. If it’s a positive reaction, the companys stock price will rise. If it’s bad, the stock price goes down.
Without question the most important factor that affects a company’s value, and therefore its stock price, is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. Public companies are required to report their earnings four times a year. If a company’s earnings are better than expected, its stock price increases. But if a company’s results are worse than expected, its stock price will fall. Simple as that.
Mergers and Acquisitions
Even if you’ve only recently developed an interest in investing and the stock market, you’ve no doubt seen or heard news accounts of one company buying another or two companies deciding to merge. Those mergers and acquisitions affect companies’ stock prices too because they permit companies to move into new markets or to maintain dominance in their current market. Market share translates to dollars, which in turn affects stock price and therefore a company’s bottom line. A few years ago when America Online announced it would buy Time Warner for $183 billion in stock, Time Warner’s stock soared 40 points in a single day.
Ask yourself if you’d buy stock in a company that was constantly downsizing. If you’re smart, the answer to that question is no. Large, publicly traded companies seek to grow and gain market share, and they do it by consistently increasing earnings and revenue. How does a company increase earnings and revenue? Quality labor is a good place to start. Without quality management, no company can succeed over the long term; so when a CEO steps down, some might see this as being negative (stock prices fall), while others might accept the restructure as a much-needed change going forward (stock prices rise).
Analyst Upgrades and Downgrades
Everyday senior analysts from various firms upgrade or downgrade securities. Sometimes the more well known analysts do it publicly to dramatic effect. News of a strong buy rating with a 12-month price target of $1,000 can potentially send a stock’s price through the roof. Of course, the opposite is also true. Strong downgrades can send stock prices plummeting.
In these instances, buyers and sellers should be cautious; such ratings are nothing more than one analyst’s personal opinion. Ultimately, the real reason a stock goes up and down in price is the number of buyers and sellers, which relates back to the law of supply and demand.