What Drives Stock Prices

What drives stock prices? It seems like there is some confusion about this. Some people might be shocked when they see a stock fall on great earnings, or vice versa.

That is because stock prices are not directly linked to the company’s profit. If a company makes a 20% return on their capital it does not mean that the stock will also go up 20%.

What does move a stock’s price is something called supply and demand. If more people want to buy the stock then sell it then the stock will go up. If more people want to sell the stock then buy it then the price will go down.

That is why stocks move faster when they fall then they do when they go up. It is easier for someone to panic and pull their money out of the market then it is for them to jump into a position. Think of how fast you would get out of something if you where scared it could harm you.

The stock market is largely an emotional machine making decisions not always by logic, but by fear and greed.

This is good news for the trader because it means that you do not have to know everything there is to know about a company in order to make a profit. Instead you can be able to estimate what could happen in the near future by observing price patterns.

History repeats itself in the stock market and by trading it you can attempt to understand it and profit as other people make the same mistakes over and over.

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