What Are Stock Prices Correlated To?
While publicly traded stocks have a mutual relationship with the issuing company's productivity and profitability, it has been argued that the more immediate driver of stock price correlation is due to the participants in a stock market.
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Exchanges
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Since early days, stocks of publicly traded companies have been traded between buyers and sellers. The "exchange"--whether a public or electronic forum--has been where the two meet.
Performance
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Information about a company's performance that is known by the public is an important catalyst to stock performance. Investors respond to news. (The overall economy has a great influence, as well.)
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Information
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Modern communication and technology have made the distribution of information nearly immediate and far more widely available to nearly anyone with the ability to receive it. This rapid dissemination of information is thought to make markets more efficient.
Sentiment
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When people view a market (for anything) positively, they are willing to pay higher prices. When they are pessimistic, they are less willing. Company-specific information does not always get treated equally, however.
Divergences
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The company/market/economic "news" and prices of stocks can begin to diverge. Market psychology is typically the reason; there are times when investors are either overly positive or negative. This occurs with any type of asset.
Bottom Line
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If a company is not successful, its sales and profits will fail. If it can not recover, its stock will eventually fail or at least become priced extremely low. The opposite is true--if a company flourishes, the stock price will reflect it.
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