Stock Quote

Investors are drawn to the stock market to make money, which is done by selling stock at a price higher than what it was originally bought for. Since stock prices are largely connected to your moneymaking goals, it helps to understand their inner workings. Stock prices are established in the marketplace, but what exactly causes them to behave the way they do? Here are several factors that influence their movements.

1) Latest Information on Stock Prices

Information is a crucial factor in the movement of stock prices as it is what the market uses to put a value on a stock at a certain price level. These are usually based on all data that the public has been made aware of. As the information is updated, the market adjusts the prices up or down depending on the way the market interprets that the information will affect the company's future earnings ability.

2) Inflation and Stock Prices

Inflation is another influential factor that affects the motion of stock prices. History indicates that there had been a strong inverse correlation between low inflation and valuations. This is because low inflation propels high multiples, and high inflation drives low multiples.

3) Economic Strength of Market and Peers

Company stocks have the propensity to track with the market, as well as with their sector or industry contemporaries. A lot of leading investment firms put significant importance on overall market and sector movements as major factors involved in the movement of prices. An example would be when a negative outlook for one stock affects other similar ones due to mere association with each other, dragging the demand for the whole sector along the way.

4) Psychological Issues on Stock Prices

These prices are also greatly influenced by human behavior. Greed is one trait that can cause stock prices to increase more than it should. New information can elicit a frantic market, may cause an increase in prices, and may make investors disregard rational valuation, preferring instead to buy the stock to ensure they are not left behind. Fear can cause significant decreases in stock prices when investors rush for the exit in an effort to avoid losses. Though listed at number 4, this factor is probably the most important factor in determining the volatility of the market at any given time.

5) Supply and Demand

Stocks that trade smaller volumes of shares do not have the liquidity of the more popular stocks. So, prices for these smaller ones are prone to fluctuations because of supply and demand. When a large shareholder wants to sell a large quantity of shares into a market with weak liquidity, that shareholder can considerably move share price.

6) Uncertainty

The movement of stock prices is also affected by a vague future. Prices do tend to bounce around a bit due to market apprehension and the unpredictable future. Because of the ambiguity of a company's future, volatility in stock prices is possible even without new information.