Why Does the Price of a Stock Change?

Stock prices change based on the law of supply and demand.

Ultimately, as with the price of any good or service, the outstanding supply and consumer demand will define its value in the marketplace. Indeed, the efficient market hypothesis states that the price of a LINK will already reflect all known information about it and what investors are willing to pay for it at the time, based on that information.

The price of a stock goes up if there are more buyers than sellers, and it goes down if there are more sellers than buyers. While the motivations of market participants might be totally different in each case, it is the perception of how well the company will perform which ultimately drives the stock price.

The most popular way to evaluate a stock's price is to take the future cash flows of the company and discount them based on a certain rate of money growth. This is called the Discounted Cash Flow Model (DCFM).

The broader methods by which companies and stocks prices are evaluated are known as fundamental and technical analysis. Fundamental analysis seeks to use the book value of a company and its competitors, as well as economic and market data, to decide if a company has a strong market position and positive outlook for the future.

Technical analysis will use price and trading data from trading sessions to try to spot trends around moving average lines, as well as many other quantitative methods such as the use of oscillators. This method seeks to find the value of a company based on trading data alone, without looking at the company’s books.

Technical analysis tends to be more useful for short-term trading, also known as Day Trading or Swing Trading, than fundamental analysis, which is more of a buy-and-hold school of thought. Both forms of analysis tend to see most movements as the market trying to find the right price around a point of efficiency where supply and demand would be held in equilibrium, theoretically, until a disruption occurred.

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