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Understanding Stock Price: Stash’s Guide

November 07, 2018

2 min read

A stock represents a unit of ownership in a company. But do you know what determines a stock’s price?

It can seem confusing at first, but it’s simpler than you might expect.

Stock price

The price of a stock, sometimes called a share, is not constant—it ebbs and flows with the market, and can change by the second. A stock that costs $10 per share today could cost $20, or even $5, tomorrow.

Why? It’s the same economics stuff you may have learned about in school: supply and demand. There’s a little more to it than that, but generally, share prices rise and fall in response to investors’ desire to either buy or sell a specific stock.

So, when a company misses its earnings forecast or receives some bad press, investors might start selling their shares in that company. If enough investors sell, the share price will likely fall. Conversely, if many investors want to buy a stock—it’s in high demand, in other words–you can expect the price to increase.

Numerous factors can affect the day-to-day demand for a stock, including earnings reports, political or regulatory changes (introduction of tariffs, interest rate hikes, etc.),  and news on the economy (e.g., the status of the job market in the U.S.).

Understanding a stock chart

Generally, investors get information about a stock’s price and price history from a stock chart. A stock chart is usually a line graph set on two axes, with the Y-axis indicating value and the X-axis representing time.

Disclaimer: This graph is not a prediction or projection of performance of an investment or investment strategy. Source: Macrotrends (2018)

The bobbing and weaving of the line is a visual representation of a stock’s value over time—and a chart can vary in duration, ranging from a single day to a stock’s entire history, which can span years to decades.

Charts also tend to have several other features, like moving averages, volume bars, and sometimes, information related to a stock’s market cap and P/E ratio.

Why stock price is important

As an investor, you’re going to be very tuned-in to the valuations of your holdings. While we generally advise that you buy and hold—that is, make regular investments and don’t sell your assets in the short-term when markets are likely to be subject to swings—you’re still going to be interested to see what type of return you may be earning.

And that’s why stock prices are important to investors: Ideally, you’d like to see a positive return on your investment, meaning that you’ll want to sell a security at a higher price than what you bought it for. But stock prices can also fall, and you’ll want to know about that too.

It’s important, though, to look at all of the factors and features of a stock chart when trying to determine whether you should buy or sell a stock. That includes looking at a stock’s history, running averages, and even the news.

Markets go up and down, and so do stock prices. Understanding how and why stock prices change is important if you hope to become a successful investor.

By Stash Team

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