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How to Decode Stock Prices

Stock Prices

Stock Prices Defined:

Stock prices refer to the actual cost that an investor must pay to purchase one share of an underlying stock. Stock prices are listed in stock tables or stock quotes; the underlying company is described by a few letters (the stock symbol) and is labeled with a specific price that is determined through a comparative evaluation of the average ask and bid in the marketplace.

In essence, a review of this information gives way to the overall demand that is present in the marketplace for the underlying stock. The fluctuations in stock prices are the fundamental relationship which creates volatility in the market and an opportunity for investors to profit off their stock transactions. The changes in stock prices can be attributed to numerous factors that are present within the intricacies of a specific sector or the broader occurrences that take place in macro-economic models.

Stock prices are primarily affected by the fundamentals of the business model, specific company earnings or progress, world events, and human psychology.

Transactions in the stock market are affirmed through an auction format in exchanges. At a stock exchange, traders will buy and sell shares of company stock; in most cases the price of a stock is determined through an evaluation of the supply and demand for that stock. For example, if more people present in the exchange wish to buy a stock rather than sell it, the price will be driven up because those shares are in high demand. The principal characteristic and question worth evaluating is what creates these gaps in supply and demand; why do some stocks have incredible demands when others have no buyers?

Stock prices fluctuate through a disproportionate ratio of buyers and sellers in a marketplace. The reasons which perpetuate such a notion can vary; stocks may be continuously sold as a result of their poor business model and their inability to generate profits or prices may fluctuate due to macro-economic factors that send a shock to the larger market as a whole.

The effect of macroeconomic variables in stock prices generally makes an impact throughout the entire market or at least uniformly in a specific industry. These instances are held separate from the fluctuations that are present within a specific business model, meaning the intricacies which cause a solitary stock to tumble or fall. In a specific sense, price fluctuations are typically present as a result of the company’s earnings in comparison to professional forecasts; those companies that earn more than their projected numbers will typically be awarded with an increased stock price.

Stock prices may also be affected by trading psychologies. Fear or panic are typical emotions which drive a stock downwards while momentum (obtained through strong earnings or a novel creation) is a common characteristic to drive a price upwards. The goal of any long investor is to purchase stocks that experience increases (short or long term depending on strategy) in their stock prices.

NEXT: Understanding a Stock's Share Price

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