What makes stock prices go up and down

Some investors believe this change is here to stay, which led to an increase in demand and higher prices for e-commerce stocks across the board. Another example: Falling interest rates reduce what savers and investors can earn from savings accounts and fixed-income investments like bonds. This can lead those looking for better returns to invest in other assets, like stocks or real estate, thus raising the demand for those assets and inflating prices.

Long-term investors, like those of us at The Motley Fool, don't much care about the short-term developments that push stock prices up and down each trading day. When you have many years or even decades to let your money grow, things such as analyst upgrades and earnings beats are irrelevant.

What matters is where a company will be five, 10, or 20 years from now. While a lot of ink is spilled about daily fluctuations in stock prices, and while many people try to profit from those short-term moves, long-term investors should be laser-focused on a company's potential to increase its profits over many years. Ultimately, it's rising profits that push stock prices higher. Discounted offers are only available to new members.

Stock Advisor will renew at the then current list price. Average returns of all recommendations since inception. In this video from our YouTube channel , we explain the different factors that contribute to the price of a stock going up or down -- over the short term and the long term -- and which news items are actually worth paying attention to.

Narrator: Pretty much everybody understands the basic premise of investing -- Buy low and sell high. Investors want to buy stocks and sell them for a profit after they move up in price. But why do stock prices move up and down in the first place? If you've ever asked that question, this video is for you.

In short, stock prices change because of supply and demand. Think of the stock market as a giant auction, with investors making bids for one another's stocks and offering to sell their own all at the same time.

Because there is a limited supply of shares available for sale, bidders must compete with one another for access to shares. The more intense the interest in a stock, the more bidders there are attracted to it, and the less interested current shareholders are in selling their own stock. As a result, potential buyers must bid higher to buy the stock, and the stock price moves up. This works the other way as well. When interest in a stock declines, fewer competing bids are entered, holders are more interested in selling their stock, and the lower the winning bid price must be.

But what determines investors' interest in a stock? In short, information. Information comes in many forms: earnings reports, press releases, news stories, court filings, Tweets, general hype, you name it. Investors, whether consciously or not, incorporate each new piece of information they come across into their impression of a stock.

Of course, every investor reacts to new information differently, and those reactions can range widely from apathy to panic to euphoria. Depending on their reaction, investors may choose to buy more shares, hold the shares they have, or even sell. In turn, these reactions are incorporated into the share price, causing fluctuations in price.

Interestingly, the change in share price itself is information that is incorporated by subsequent bidders, and the cycle of information-reaction-price move-information repeats once again. The first was in March and the most recent was this summer as the Delta variant surged around the country, causing traders to worry about market recovery. Sentiment drives demand, which also influences supply. Psychology is critical for market dynamics. There are several theories that try to explain how market sentiment can drive the supply and demand of stocks:.

The Behavioral Financial Theory: This theory looks at psychological factors when analyzing financial markets. Some investors act on emotion and in some cases, overconfidence in a particular security or asset. These reactions can cause biased investing decisions, potentially hurting your investment. The Animal Spirit Theory: This theory assumes that people act on instinct in situations of uncertainty, the same way animals are said to operate. In turn, actions — like making moves on the stock market — are also driven by instinct.

When the market is good, investors will buy. When the market is bad, investors will sell. The lower the VIX, the lesser the fear. When the market is stressed, VIX goes up. The VIX averaged Keep in mind that even with careful research, investing always carries some inherent risk.

An easy way to do this is by primarily investing in ETFs and index funds instead of individual stocks. Index funds and ETFs are great ways to build wealth with relatively low maintenance and low barriers to entry. Ultimately, though the stock market may have its ups and downs in the short term, investing is a great way to build wealth in the long term. A discount rate is the rate investors use to calculate the present value of future cash flows.

Higher discount rates lower the valuation investors are willing to pay. An investor who demands a 12 percent return is willing to pay less for the same asset than an investor who requires only an 8 percent return. Paying a high multiple initially can wipe out the return from dividends and earnings growth if the multiple meaningfully compresses over time. Stock prices can move for any number of reasons over the short term. Political issues, economic concerns, earnings disappointments and countless other reasons can send stocks lower or higher.

But over the long term, stock prices will be driven by just a handful of fundamental factors such as earnings growth and changes in valuation. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

How We Make Money. Editorial disclosure. Brian Baker. Written by. Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people …. Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate.

He oversees editorial coverage of banking, investing, the economy and all things money. Reviewed By Allyson Johnson. Reviewed by. Allyson Johnson.

Allyson Johnson leads marketing and fundraising for Gateway Partners.