How are prices determined in the stock market?


Quick Answer

The primary influence on share prices in a stock market is the relative levels of supply and demand, according to Investopedia. If more people want to buy a stock, the pressure pushes the price higher. If selling pressure outweighs buying interest, share prices typically decline.

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How are prices determined in the stock market?
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Full Answer

In general, the price of a stock on a given day of trading is reflective of the potential growth investors expect going forward. People buy stocks on the hope they appreciate in value. Indirect factors contribute to the relative changes in share supply and demand. Earnings reports are a key stimulant, according to Investopedia. When companies report strong earnings and project strong future earnings, buying interest can compel share prices higher. Poor earnings result in falling share prices.

Something known as "herd instinct" tends to affect the direction and momentum of a stock's price as well, reports Investopedia. When news or buying activity pushes a stock in one direction, the mentality of the larger trading environment often follows suit. Thus, upward price action can escalate with herd buying, and downward price action can escalate with herd selling. Political events, analyst ratings and reports, economic news, and other external environment activities all contribute to changes in perceived value of a stock and its market price.

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