Many people new to the stock market have a hard time understanding how the price of stock is set. Believe or not, there is no complicated formula involved. It simply boils down to basics market economics. The stock price is set based on supply and demand.
In terms of the stock market the supply represents the amount of sellers and the demand represents the number of buyers. In addition to that, stock market prices are based, not only on the number of buyers and sellers, but the price that buyers are willing to buy at and sellers are willing to sell at. Essentially, stock market buyers and sellers are negotiating the price. When both parties mutually agree on a price, then the transaction is completed.
The stock price will go down:
When there are more stock sellers than stock buyers. This means that more people want to sell this stock than to buy it.
When stock sellers are willing to sell the stock at a lower price. This happens when a stock holder is desperate to sell off a stock that they lower the price to make it more attractive to potential buyers.
The stock price will go up:
When there are more stock buyers than stock sellers. This means that more people want to buy the stock than sell it.
When stock buyers are willing to buy the stock at a higher price. This will happen when a stock buyer is desperate to buy a stock that they offer a higher price to persuade the stockholder to sell.
Notice how the price fluctuates based on the emotions of stock sellers and buyers. There are several factors that can trigger a stock buyers willingness to buy and a stock sellers willingness to sell.
The Factors That Influence Stock Investor's Decisions
Here are the factors that trigger stock investors to buy or sell a stock in a particular company.
Stock investors pay close attention to a company's financial statements. The major financial statements that investors look at are the income statement or profit & loss statement, the balance sheet, and the statement of cash flows. The income statement highlights the sales and expenses of a company and ultimately their profits or losses. The balance sheets analyzes the company's assets, liabilities, and equity or net worth. The statement of cash flows shows how much actual cash moved in and out of the company along with the company's cash position. All of these statements can influence investors to want to buy or sell.
Sometimes investors do not agree with the vision of the company leaders. In addition to that, poor financial performance is usually related to bad management. Furthermore, management may have the company involved in fraudulent or unethical business practices. All of which influence an investor's decision on whether to invest or not.
The state of an industry that the company is involved in has a major impact on company sales. With constant development in technology and changes in consumer demand, an industry can become obsolete. As a result, companies within that industry will suffer a loss in sales. If the company is not able to adapt to the changes in the industry then they will no longer be able to operate.
No matter how much profit a company makes, there are some investors who will not want to be involved simply because of their social or religious beliefs. In addition to that, companies can suffer losses in sales because of customers refusing to give them any business based on their social beliefs. Wal-mart is a great example of a company that has been affected by several social issues.
A lawsuit can cripple a company financially. When investors see that a company is spending more money on legal fees than building the business, they will view the investment unfavorably.
Legislation that is passed on all levels of government, federal, state,or local, can affect a corporation negatively. Regulations and legislation passed can affect a company's ability to make sales in addition to raising a company's costs. As a result, government regulations can affect the way an investor views different companies.
The media can play a major role in how a company is perceived by investors. If it was not for the media investors would not be aware of legal issues, government regulation, and social issues that can impact a company. The biggest problem with investors relying solely on the media for their information is that the media can get it wrong. Nevertheless, the media plays a huge role in influencing stock buyers and sellers.
Lastly, remember that the stock price is based on simple market economics which involves stock buyers and stock sellers. The price is determined by the stock buyers willingness to buy and the stock sellers willingness sell. The stock buyers willingness to buy and a stock sellers willingness to sell is influenced by factors relating to the company's financial performance, government regulations, legal issues, social issues along with the media.