How Stock Market Price Rises and Falls

Understanding how stock market price rises and falls is similar
to understanding the prices of other products in the market. It
also follows the law of supply and demand. Price of stocks rise
and fall due to the following reasons:

1. Company profit projections and image

A company's growth and profit forecasts describe how capable a
company is in delivering its promises to its investors. These
numerical projections are carefully prepared by a company based
on their past profits and projected additional profits due to
new products and services, operations and infrastructure
improvement.

Aside from profit forecasts, company image can also make an
impact on a company's profitability. Rumors of change in
management, take-over, mergers, and even personal issues about
the company's top executives can affect the company's image.

For example, a rumor of a merger between two big companies
projects more stability and greater profit projections for both
companies. As more investors would want to buy stocks from these
merging companies, the demand for their stocks will rise. Based
on the law of supply and demand: the greater the demand for
stocks, the higher will their prices be.

A bankruptcy rumor about a company can send its investors to
sell all their stocks. If there are more sellers than buyers of
stocks then the supply (of stocks) is greater than the demand
for stocks thus, stock price will fall.

2. Political Economy

General news about the local and global politics has an
immediate impact on the economy and consequently to stock market
prices. Politics and economics are correlated. Positive news
such as lower unemployment rates, increased productivity, peace
and order, and strong confidence in the government has positive
impact on the economy. Such news encourages more local and
international investors to open companies in a certain location
or country. This in turn would generate more jobs, and as an
effect, would encourage more trading in the market at higher
stock prices in general due to the increase in demand for stocks
of different companies. On the other hand, negative news such as
political instability and turmoil, security problems such as
terrorism and insurgency, frequent strikes, and inflation has
negative impact on the stock market prices. Investors are driven
away by these things and close-up. As an effect, more
stockholders would sell out. This creates more sellers than
buyers thus stock market prices fall.

3. Interest rates

Higher interest rates are associated with a slump in economic
growth. This creates a sluggish environment where investors
become apprehensive in buying stocks. Either they keep the
status quo or sell out their stocks. When the demand for stocks
is not high, prices will go down.