Why Do Stock Prices Flucuate

The most common question that you are most likely to hear from the new comers to the trading industry is:  Why do stock prices fluctuate?

The stock market is actually acting as a giant auction – only instead of antiques and heirlooms, it is the ownership in a business that is up for grabs to anyone willing to pay the price. The stocks are traded at places that are called exchanges.  At these exchanges the traders will buy and sell the shares of a company.

Generally, the prices of these stocks will be then determined by the supply and demand. For example, if there are more people that want to buy a certain stock than to sell it, the price of it will be then driven up because those shares of stock are rare and most people will pay for a higher price for that stock. On the other hand, when there are a lot of shares of stock that are for sale and when no one is interested in buying them, then naturally the price will quickly fall.

Because of this reason, the market may appear to be fluctuating in a wide range. Even if you see that there is nothing wrong with the company, a number of large shareholders who are trying to sell millions of these shares at a time will be able to drive the price of the stock down; it is simply because there are not enough people that are interested in buying a stock.

That is why it is important to only buy shares in a company which has a lot of trading volume.  Even if a companies stock is a good buy and the stock price increases 400%, if there is no volume you cannot get the profits out of the stock.  If you try to sell 1000 shares and the volume for a day is only 800 shares, there will not be a buyer for your shares and the price will actually tank because of the large amount of shares being traded.  That then is why one important stock tip is to watch the traded volume.