What Factors Make a Stock Value Change?
Bulls and bears. Fortunes have been made and lost on the predictions of the change in stock value. There are several factors that figure in the change in a stock's value. Some factors relate directly to the workings of the stock market. Other factors, however, are based on the fact that beyond the numbers, humans run the stock markets.
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Supply and Demand
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The value of stock reflects what investors believe a company is worth. While companies may initially set a stock price, the actual trading price is largely determined by the market. Supply and demand are a major factor in stock price. While large companies may trade in millions of shares of stock, most companies do not have such volume, or liquidity. As a result, having a large block of stock become available or suddenly disappear from the market can dramatically affect stock price, at least in the short term.
Information
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A company is approved for a new patent that promises to generate tremendous earnings. Another company is hit with a multimillion-dollar lawsuit for product liability. Information about the fortunes of a company can generate dramatic rises and falls in the price of that company's stock. With the rise of the Internet and other means of rapid transmission of information, stock prices can rise and fall on unconfirmed rumors as well as on reported news.
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Uncertainty
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New companies with unproven track records will often show great volatility in stock prices. Much of the dot-com bubble and burst was driven by this sort of uncertainty. Companies with long histories tend not to have such volatility in stock prices. However, with the financial crisis that began in the late 2000s, even stalwart companies such as General Motors saw their stock values decline dramatically, due to uncertainty of the American car industry in general and GM in particular.
Stock Market Splits
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When a company does a stock price split, it is much like making change for a 20-dollar bill by obtaining two 10-dollar bills. However, the split also results in a lower individual stock price, which is intended to make the stock more attractive to buyers. The ironic result is that the value of the stock often increases in the immediate wake of a stock split.
Human Nature
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Fear and greed have played significant factors in the economy, and the stock market is no exception. When the market is riding high, many investors who would otherwise not be involved in the stock market feel compelled to jump in for fear of being "left behind." On the other hand, when stock prices are down, many investors stay away, even from stocks that are generally performing well. These factors will also drive the value of individual stocks and the stock market in general either up or down.
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