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As I understand it, stocks are just shares in a business. If a business is worth 100,000 francs and is made up of 100 shares, each share should be worth 1000 francs. So my question is, why are share prices constantly changing. I am sure the value of a company doesn't change every hour/minute/second. What makes stock prices change constantly?
Hi there,
Supply and demand plays the biggest role in determining stock prices. Investors speculate on whether a business will grow and by how much, rather than just considering its current value. When investors believe that the value of a business will increase significantly, they are willing to pay a premium above the actual value to acquire shares in that business. This pushes the price of stocks up.
When investors believe that the value of a business will decrease, they try to sell their shares and the new supply of shares on the market drives the price down.
If speculation drives a stocks price up to where it is worth significantly more than the actual share of the business is worth and will be worth in the foreseeable future, it is said to be "overvalued". Overvalued stocks are at risk of losing value drastically because their value is likely to drop until it matches the actual value of the represented share in the business.
Stocks can also be "undervalued" it they are being sold for a price lower than the actual value of their share of ownership in a business.
Best regards from Moneyguru
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