This archive report was first published on 27 November 2019.
Understanding Stock Price Fluctuations ¶
Stock prices are often influenced by a multitude of factors, including earnings, management, industry, and economic performance. However, these factors have a minimal direct impact on prices. Instead, they affect the balance of supply and demand, which is the fundamental truth that every investor or trader needs to grasp.
Stock prices are a direct result of supply and demand. All other factors affect the desirability of owning or selling a stock. If a company surprises stock owners with low earnings, demand for the stock could wither, leading to a decrease in price.
When supply and demand find equilibrium, prices move up and down in a narrow price range. This period is referred to as consolidation. However, if demand for a stock exceeds the supply, its price will rise, but only to the point where buyers find the price attractive.
As you know, declining demand will cause stock owners to sell, leading to a decrease in price. Conversely, when investors start buying, the stock's price will rise as more and more sellers need to be enticed to sell their shares.
These mechanics of supply and demand are the most important truths that new investors need to learn about stock prices. It is the give and take between supply and demand that sets the price.
Identifying stocks with the proper technical indicators to motivate institutional buying or selling is critical in locating stocks that are ready to make large price moves. It is no wonder that stocks with huge numbers of outstanding shares require institutional support for their prices to move.
Look for stocks with a rising demand by examining trading volumes and volume-based charts like OBV. If a share trades on a daily average volume of 200,000 and suddenly starts trading over that average, it is an indicator of demand or supply rising.
