Why do Stock Prices go Up and Down?

We'll give you the short answer first!

Stocks go up because more people want to buy than sell.  When this happens they begin to bid higher prices than the stock has been currently trading.  On the other side of the same coin, stocks go down because more people want to sell than buy.  In order to quickly sell their shares, they are willing to accept a lower price.

Having said this, we'll take a look at the various reasons that cause traders to want to buy or sell a stock.

It is possible to look at the financial statements of a company and determine what the company is worth.  Investors who take this approach are said to examine the company's "fundamentals".  They attempt to find an undervalued stock - one that is trading below it's "book value".  They feel that sooner or later other traders will realize that the company is worth more than the current price and begin bidding it up.

Another investment psychology it called the "technical approach".  This is when traders closely examine charts of the stock's past performance looking for trends that they feel will be repeated in the near future.  These traders also look at what is happening in the market as a whole trying to anticipate the effect it will have on an individual stock.

Sometimes companies trade at half their "book value" while at other times they may trade at double, triple, or even higher.  When this happens it can create some sudden and large price swings.  This volatility is what makes it possible to make large profits in the market.  It is also responsible for huge losses.

The stock market is essentially a giant auction where ownership of large companies is for sale.  If some investors think that a particular company will be a good investment, they are willing to bid the price up.  By the same token, when many investors want to sell a stock at the same time the supply will exceed the demand and the price will drop.

Watching the stock market can be likened to watching a ball bounce.  It goes up and comes down and then goes right back up.  This can be extremely frustrating for many investors who want it to go up in a steady pattern.  It is this volatility in the market as a whole and in the individual stocks that the experienced trader profits from.  In the absence of a lot of experience, the individual investor needs a proven source of information and direction. 

Many investors (as opposed to traders) have a "buy and hold" philosophy.  This would work well in a constantly rising market.  Unfortunately, the stock market does not go up in a straight line.  There are ups and downs that frustrate this type of investor.  Today many investors have become "traders" who buy and sell on the fluctuations of the market and the individual stocks.  These traders make money in any market - up or down!

Another well known investment site www.fool.com lists the following reasons for stocks going up and down:

Why Stocks Go Up

• growing sales and profits
• a great new president hired to run the company
• an exciting new product or service is introduced
• more exciting new products or services are expected
• the company lands a big new contract
• a great review of a new product in the press or on TV
• the company is going to split its stock
• scientists discover the product is good for something else
• some famous investor is buying shares
• lots of people are buying shares
• an analyst upgrades the company, changing her recommendation from, for instance, "buy" to "strong buy"
• other stocks in the same industry go up
• a competitor's factory burns down
• the company wins a lawsuit
• more people are buying the product or service
• the company expands globally and starts selling in other countries
• the industry is "hot" -- people expect big things for good reasons
• the industry is "hot" -- people don't understand much about it, but they're buying anyway
• the company is bought by another company
• the company might be bought by another company
• the company is going to spin-off part of itself as a new company
• rumors
• for no reason at all

Why Stocks Go Down

• profits slipping, sales slipping
• top executives leave the company
• a famous investor sells shares of the company
• an analyst downgrades his recommendation of the stock, maybe from "buy" to "hold"
• the company loses a major customer
• lots of people are selling shares
• a factory burns down
• other stocks in the same industry go down
• another company introduces a better product
• there's a supply shortage, so not enough of the product can be made
• a big lawsuit is filed against the company
• scientists discover the product is not safe
• fewer people are buying the product
• the industry used to be "hot," but now another industry is more popular
• some new law might hurt sales or profits
• a powerful company enters the business
• rumors
• no reason at all

Source: http://www.stock4today.com