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Have you ever consistently watched the price of a stock?
You probably noticed that the price changed everyday.
It may have went up one day, down the next and back up the following day.
That’s typical for any stock.
But what causes a stock price to change so often?
It’s simple, all kinds of things…
What We Don’t Know
So, why does a stock price change?
The short answer is: nobody knows specifically.
“The Dow is down 50 points as investors react to news of [X].”
Stop it, you’re just making stuff up. “Stocks are down and no one knows why” is the only honest headline in this category.
*Taken from Morgan Housel’s article “Stupid Things Financial People Say“
There are many reasons for a stock price to change, but there is no one person that can tell you exactly why a specific stock’s price changed on any given day.
Enough about what we don’t know, let’s talk about what we do know…
The Economist Answer
The most foundational aspect of the stock market (like any market) is supply and demand.
It’s like anything else, if there are more buyers than sellers, the prices rise. If there are more sellers than buyers, the prices fall.
That explains the basic economic reason that a stock price would change, but that doesn’t really help you much, does it?
The Stock Trader Answer
Stock traders are different from investors.
It’s not necessarily bad to be a stock trader, but it’s not really my idea of sound financial practice and 9 times out of 10 it’s about as safe as Vegas.
So, what do traders notice about stock prices?
Stock traders attempt to track every single change.
That’s a lot, considering that stock prices change all the time due to:
- Company news…good or bad.
- Earnings reports…good or bad.
- Popular stock advisers endorsing or denouncing a stock.
- Analysts opinions.
The Investor Answer
Investors don’t really care about stock price changes.
Investors are not affected by trivial news and an “earning miss” here or there.
The market fluctuates. All the time. It’s too stressful to worry about every movement.
Investors don’t base their decisions on a stock price.
What You Need to Know About Stock Prices
There is one very important thing to understanding about buying stocks…
Stock prices don’t matter.
We will never fully know the exact reason for a stock price change in any situation.
A stock price alone doesn’t show you the value of a company.
We don’t invest in a company’s stock price, we invest in the company.
Whether you invest in individual stocks, index funds or mutual funds…you shouldn’t let stock prices alone affect your decisions.
You can watch the market every single day if you want to, but don’t let the daily changes lead you to make changes in your portfolio.
Hopefully this article gave you an insight into some things that can affect a stock price…basically everything can.
More importantly, hopefully you understand why stock prices don’t matter.