What controls the price of a stock? I know outside influences such as press releases on the economy (were going to war), if the stock is being sold or bought heavily, releases on company earnings, etc…
But what makes it fluctuate in a days time? Is there some formula used in a computer somewhere? Who physically pushes it up or down a half point?
There is a guy called a market maker for each stock and he makes sure that the stock moves. For example, if there are a bunch of people who want to buy some of the stock and no sellers, he will raise the price until some of the holders are willing to sell.
Haj
“Market maker” is the NASDAQ term. The NYSE has “specialists”. The point is, though the actual mechanism differs in details from exchange to exchange, there are human beings managing the bids and asks. A little blurb on the difference:
You have to remember that market systems such as this were in place long before there was any technological possibility of automating it.
I might also point out what that link has to say under the entry “catalyst” and “principal” - they schmooze big investors when they need to, and purchase / sell from their own inventory. I doubt that anybody is seriously thinking about automating the process for a major market.
The most basic answer for value determination is a simple finance principle: The value of any security is the present value of it’s expected future cash flows.
Expected value= D1/(Market risk premium-expected company dividend growth rate). D1 is the next years expected dividend. So, as you can see mathematically, the price of the stock is worth all the dividends you will get in the future, discounted back in time by an arbitrary interest rate you choose. For companies that don’t issue dividends, this obviously does not work, but for those companies it’s still the same idea of future cash.
The question you might be wondering is: Why does the price of a stock change when there is no new information on the company from the previous day? Was the previous days’ price wrong? The main culprit for price changes for no apparent reason is big portfolio managers making other decisions about any number of things that don’t have anything to do with the stock they sell. If the manager sees an opportunity overseas and has some IBM stock, he might sell that stock in order to free some money up to buy that foreign security. And since his decision makes up such a large percentage of total IBM stock, the price actually reacts significantly by however much he sold the stock over or under the existing price. Some other managers will follow suit. This coupled with say 4 other financial phenomenons unrelated to the stock could bring the price down from 60 to 58 for no company-related reason. This is called “market risk”. THe companys’ stock just being on the market is risky in itself… not even counting the company-specific riskiness.
Summary:
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Expected future cash flows
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Portfolio managers, market risk.
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IMHO, Humans are too overreactive about implications of new info. People interpret info in so many different ways and stretch the implied meanings so way out of proportion in order to try and get a jump on everyone else that prices in the stock market fluctuate too much, IMHO. But that’s human nature to try and get rich quickly rather than use the market as a responsible safe haven for their money, so it’s the way it is. This is the real reason for why price changes so much within a day.
Trader quote: “Some days you are the dog and some days you are the hydrant.”
Also, the guys on the floor who process your transations take a small cut of all the money that goes in. This contributes to the minor price flucations you see on a normal, non-eventful day.