Stock Market Basics: What Makes Stock Prices Rise and Fall

While the world is dealing with the current recession – with people being laid off every odd day and with economies crashing down, there are many common people who are trying to fathom what is it that exactly caused all this…The stock market is a mystery for many…For all the people who are struggling to fathom the basics of the stock market, this article attempts to explain you the stock market basics – what makes stock prices rise and fall? So here we go…

Before we start getting into the basics of what makes the stock market rise and fall, we need to start from the basics and answer questions like – what are stocks and shares? Well, a stock is nothing but a piece of ownership of a company. Since companies need financial assistance for growth – they sell pieces of ownership of the company by means of stocks. Every individual unit of a stock is called a ‘share’.

If the company earns profits, it gives back the profits to its stockholders by means of dividends. The authority of a person in the company policies and decision-making is proportional to the number of stocks he/she owns. Thus, this means a person who own 100% stocks of a particular company is the owner of that company. People who own a sizable amount of stocks in the company are allowed to be on the board of directors who have a say in the company’s policies.

So now that we’ve got our basics in place, we need to know what is it that makes stock prices rise and fall? Well, to put it very bluntly – the company’s stock prices are dependent on how well the company is doing in the market. The better the company’s position in the market – the higher is the amount of people who are willing to invest in its stock – and hence higher is the price of the stocks. On the contrary if a company is suffering severe losses and not faring well in the market- there would be less number of people who want a piece of ownership (stock) of that company- and hence lesser the prices of the stocks.

Well in addition to this crude explanation there are several other factors, which are instrumental in deciding the rise or fall of share prices. These factors are as follows:

• Investor participation: This refers to the number of investors who are interesting in buying stocks of the company or the number of investors who are already stockholders of the company.
• Gross earnings of the company: This refers to the success of the company in terms of its turnover and profit numbers.
• Company Image: This refers to the general image of the company in the market with regards to its financial position, profits and also its core values.
• General Market Sentiment: This refers to the general trends in the market which can hamper or enhance the company’s position.
• Overall condition of the U.S. and world economies: The world economies including the US economy are all inter-dependent on each other in some way and hence have a effect on the share pricing.