Why Stock Prices Fluctuate

Investing in the stock market is always a bit of a gamble.  This is because stock prices are constantly fluctuating in often unpredictable ways.  The most basic question that arises when people first begin to make forays into the world of investment is: Why do stock prices fluctuate?  At a base level, stock prices are essentially governed by the law of supply and demand.  Supply and demand is just what it sounds like.  If a given stock is in demand, then the price of the available stock rises.  On the other hand, if a given stock is readily available, then the price will drop.

The value of a company is determined both by what price its stock shares are selling at and by how many shares are available on the market.  The individual share prices of two different companies cannot necessarily give you a good idea of their overall value.  A single share of a given may sell for much less than that of another, however if more shares exist for the first company than the second, it may very well be worth much more.  In this way, share prices can be deceiving. 

Ultimately, the root of what causes changes in stock prices is intangible.  Much of it is determined by what investors perceive to be happening to and affecting the value of a company.  Attitudes and expectations toward the future of a company have a definite impact on the price of its stock.  The price of a company’s stock does not necessarily have anything to do with the overall value of the company, though quite often it is a factor.  The dot com bubble is an excellent example of this.  In the heyday of the dot com bubble, numerous companies had shares that were worth significant amounts of money, despite the fact that they were not turning a profit.