How are Stock Prices Determined Part 1

Many have been extremely cynical when it comes to the trading of stocks.

I'm sure you have all heard about the dreadful bankruptcies, suicides, murders and cases of insanity. While I dare not downplay the degree of the pain stocks can actually bring you, I will like to emphasis that these are just some of the radical consequences that might happen to you.

Why do I say so? In actual fact, these people are de facto the high risk-takers, they expect high returns and fast returns so naturally they go for the extremely risky stocks that have the propensity to fluctuate within days from the trough all the way to the crest.


However, in the real society, people do not play it that way, they tend to invest in companies that are large and stable and they dabble with the highly secured blue chip market as well.

So now, let's move on to how are stocks prices actually determined? Why are the prices up and down everything and what is actually causing it to go up and down?

Simple, basically investors are attracted to companies that post substantial profits and potential long-term growth; because many of these investors buy the stocks of these companies, their stock prices surge. Conversely, investors are reluctant to invest in companies that display weak and bleak earning prospects so they tend to sell the stocks rather than buying them, and thus, the stock prices plummet.

Interest rates and currency rates have a huge role in the determination of stock prices. Let's say the interest rate of the country the company is in, is currently at an all-time low, chances are that the stock prices of the company will rise. Why is that so? Simple, with a low interest rate, companies will grab the opportunity to borrow and invest the borrowed amount for long-term growth. Investors, being enticed, by the future plans the company has, will put their trust in the company along with their money. However, if the interest rate is high, stock prices naturally drop because most of the companies do not have sufficient funds to invest in new areas for future growth so they tend to enter the hibernation stage until the interest rate falls. In the mean time, the investors also go into the hibernation period and they will rather sell than to bear the risk of holding on to them.


Currency rates demonstrate the same scenario. If the currency rate of the country is strong, imports will be high whereas exports will be low. In this case, only companies who focus more on local production and construction will thrive. On the other hand, companies dealing with exports and shipping will suffer a huge impinge on their business and will most likely crash if the high currency rates is perpetual.

Finally, a rising market is called the "bull market" and the falling market is called the "bear market".

Credits -bryankludt, -ballyhooligan