Everyday, all kinds of people publicly tell us why a stock would go up or down in the near future. Sometimes they talk about earnings, other times they talk about the economy but at the end of the day, stocks go up and down based on basic supply and demand [1].
Stocks Go Up when People Want to Buy Them
A stock price at any particular moment in time is based on the record of the last transaction where a buyer’s bidding price matched a seller’s asking price. It doesn’t mean that you would be able to buy or sell it at that price, so it technically represents a best estimate of how much the stock is worth in a particular point in time.
When more buyers are present, they will in effect need to increase their bids, pushing the stock prices higher (assuming sellers are willing to sell).
Stocks Go Down Because Everyone Wants Out
On the other hand, when a stock is hated, everyone wants to sell them. This pushes the price that buyers want to buy them at and the transaction price keeps going down, pushing the stock price lower.
Sure the reasons for stocks to go down might be because of bad news or an earnings miss or whatnot, but if no one wants to sell the stock, the price will not go down.
Why This is Important
Having realized this fundamentally helps us make sense of the ilogical. It will help us understand why stocks go down the day when there’s no news and help us understand why greed and fear play such a large role in this market. It will help us understand that short term, there is no way to predict which way a particular stock will go unless we are masters of psychology and can pinpoint every shareholders’ sentiment.
From now on, do our analysis but understand that the direct reason of why stock prices change is still because of supply and demand.