How Do Stock Prices Rise?
The stock market is an exchange where shares of company stock are traded daily. In the U.S, the New York Stock Exchange and NASDAQ trade billions of shares each day. The prices of these shares rise and fall for a number of reasons based on the collective decisions of investors in the market.
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Supply and Demand
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The most basic analysis of why stocks rise or fall in price is based on the supply and demand of buyers and sellers. When there are more buyers the price rises and when there are more sellers the price falls. Technical analysts use data such as volume to predict price movements of stocks. For example, if there are relatively large numbers of investors buying a stock the trader will predict that the price will continue to go higher. The same analysis can be done for investors selling a stock.
P/E Ratio
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A fundamental analyst makes predictions about the movement of a stock based on the company's financial metrics. They believe that the company's fundamental underlying value drives investors to buy or sell a company's stock and therefor use these metrics to predict price movement. One common metric is price to earnings ratio. This ratio divides price per share by the company's earnings per share. If the ratio is low compared to the overall stock market or industry in question, the company's stock is predicted to rise to comparable levels.
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Book Value
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Book value is another component that can affect stock prices. This term means the total value of all the assets of a company. Some analysts use this number as the real value of a company, especially for banks or other financial institutions. That is because this value is what the company would be worth in the event that everything is sold off. Fundamental investors love to find stocks that are trading below book value because they could instantly be liquidated for more value.
Dividends
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Dividends are a final reason that a stock price can rise. These are simply payments to shareholders from company profits that have instant value to the holder and, subsequently, could make the price rise. In theory, if Company X has a stock trading at $20 and issues a $2 dividend per share, the price will rise to $22. That is because a smart trader will buy the stock and hold it for the $2 profit. Managers realize this fact and usually announce dividends well ahead of payment, so the price slowly grows to the full value.
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References
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