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How Stock Prices Change
Supply, demand, and market sentiment
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A stock price is the amount buyers and sellers agree on when shares of a company trade in the market. Prices change because people constantly update what they think a company is worth. If more buyers want the stock than sellers are willing to provide, the price usually rises. If more sellers want to sell than buyers want to buy, the price usually falls.
News, company earnings, interest rates, and investor mood can all shift demand or supply for a stock. Strong earnings may attract buyers because the company looks more profitable, while bad news may cause sellers to accept lower prices. The bid-ask spread shows the gap between the highest price buyers offer and the lowest price sellers will accept. Understanding these forces helps students see that stock prices are not random numbers, but the result of many decisions happening at once.
Key Facts
- Stock prices move when supply and demand for shares change.
- More buyers than sellers usually pushes price up.
- More sellers than buyers usually pushes price down.
- Bid-ask spread = ask price - bid price.
- Market value of a company = share price x number of shares outstanding.
- Earnings per share = company profit / number of shares.
Vocabulary
- Stock
- A stock is a small ownership share in a company.
- Share price
- Share price is the current cost to buy one share of a company's stock.
- Supply and demand
- Supply and demand describe how the amount sellers want to sell and buyers want to buy affects price.
- Bid-ask spread
- The bid-ask spread is the difference between the highest price a buyer offers and the lowest price a seller accepts.
- Market sentiment
- Market sentiment is the overall mood or attitude investors have about a stock or the market.
Common Mistakes to Avoid
- Thinking a rising stock price always means the company is safe, which is wrong because prices can rise from hype or short-term excitement rather than strong business results.
- Ignoring the bid-ask spread, which is wrong because the price you see may not be the exact price at which you can buy or sell.
- Assuming good news always raises a stock price, which is wrong because investors may have already expected the news or may focus on other concerns.
- Believing one trade sets the true value of a company forever, which is wrong because stock prices update continuously as buyers and sellers react to new information.
Practice Questions
- 1 A stock has a bid price of 25.10. What is the bid-ask spread?
- 2 A company has 10,000,000 shares outstanding and each share trades at $18. What is the company's market value?
- 3 A company reports higher profits than expected, but its stock price falls after the announcement. Give one possible reason this could happen using supply, demand, or market sentiment.