To understand why stock prices change you must understand what market forces are. The best way to understand market forces is easy: it is simply a matter of supply and demand. When people want a stock (demand) and this desire to buy it is greater than what is available (supply) to be bought, the price goes up. The opposite is also true. When there is a surplus of something that people want to sell (supply) and not as many are interested in buying (demand) then the price goes down.
The concept of supply and demand is easy enough to understand. The difficult part is understanding why people decide they like a particular stock and not another. The best tool to measure this by is the positive and negative news about a company.
Generally, when the price moves on a stock it is an indication that investors fin the value of the company moving either up or down accordingly. But, the value of a company is not directly related to its stock value. The true value of a company is figured according to its market capitalization which is calculated by multiplying the number of share outstanding by the current stock price. Consider, as an example, a company whose stock is worth $10 per share and 2 million shares outstanding. This company has less value than a company whose shares are trading at $5 a share with 5 million shares outstanding. ($10 x 2 million = $20 million versus $5 x 5 million = $25 million). The price that a company’s stock is currently selling for doesn’t just reflect the company’s value but it also is a sign of the growth investors are feeling it will experience in the future.
In truth the greatest determinant that affects a company’s value is its earnings. Companies that fail to make a profit (earnings) can’t survive, and those that do make a profit report positive news about their company. The positive news in turn affects why people favor a particular company and results in increase stock prices.