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| Understand the factors that influence share prices and learn to think carefully before buying or selling shares. |
Stock Market Academy – Part 4: Why Do Share Prices Go Up and Down?
From Zero to Confident Investor
Have you ever wondered why a share costs ₹500 today but ₹550 tomorrow? Why does one company's share price rise while another company's price falls? And why do share prices sometimes fall even when a company reports good profits?
Welcome to Part 4 of the Stock Market Academy! In this lesson, we will understand how share prices change, what buyers and sellers do, and how company performance, news and market conditions influence prices.
Don't worry if you are completely new to investing. We will use simple English and everyday examples to understand everything step by step.
What Makes a Share Price Change?
The price of a share changes mainly because of demand and supply.
- Demand: How many people want to buy a share, and how strongly they want to buy it.
- Supply: How many shares existing shareholders are willing to sell, and at what prices.
Imagine that a popular shop sells fresh mangoes.
If many people want mangoes but only a few are available, sellers may be able to charge a higher price.
But if the market has plenty of mangoes and very few buyers, sellers may need to lower their prices.
The stock market works in a similar way. However, share prices are also influenced by investors' expectations about a company's future, not just its current performance.
When buyers are willing to pay higher prices and sellers agree to those prices, a share's market price can rise. When sellers accept lower prices and buyers are unwilling to pay more, the price can fall.
1. How Does Demand Make a Share Price Rise?
Let's understand with an imaginary company called ABC Foods.
Suppose ABC Foods sells packaged food products across India.
Initially, its share price is ₹500.
Now imagine that the company announces that it has developed a popular new product. Investors believe that this product could increase future sales and profits.
More investors become interested in buying ABC Foods shares.
Some shareholders are willing to sell only at higher prices. Buyers who want the shares may therefore have to offer more.
The share price might rise from ₹500 to ₹530.
Remember, this is only an illustration. More buyers do not guarantee that a share will rise, and the price can change for many reasons.
Key lesson: Strong buying interest can push a share price upward when buyers are willing to pay higher prices.
2. How Does Selling Pressure Make a Share Price Fall?
Now imagine that ABC Foods faces a different situation.
The company's production costs increase, its sales decline, and its profits fall below investors' expectations.
Some investors become worried and decide to sell their shares.
If buyers are not willing to pay the previous price, sellers may have to accept lower prices to complete their sales.
The share price might fall from ₹500 to ₹450.
However, a falling price does not automatically mean that a company is bad. The decline could also be caused by a wider market fall, changing expectations or temporary uncertainty.
Key lesson: A share price can fall when sellers are willing to accept lower prices and buyers do not offer enough to maintain the previous price.
3. Six Important Factors That Affect Share Prices
Demand and supply explain how prices change. But what influences investors to buy or sell? Here are six important factors.
Factor 1: Company Sales and Profits
Investors examine a company's sales, profits, expenses, debt and cash flow.
Suppose a company increases its sales and profits while keeping its expenses under control. Investors may become more confident about its future.
This can increase demand for its shares.
On the other hand, falling sales, increasing debt or repeated losses may create concern.
But remember: good financial results do not always cause a share price to rise. Investors also consider what they had already expected from the company.
Factor 2: Future Expectations
The stock market does not look only at what a company has achieved. Investors also try to estimate what it might achieve in the future.
Imagine that a company announces a new factory.
Investors may expect the factory to increase production and profits over the next few years. Its share price might rise before the factory even starts operating.
But if the factory becomes delayed or costs much more than expected, the price may fall.
This is why share prices can move before a change appears in a company's actual profits.
Factor 3: Company News and Announcements
Company announcements can influence investors' decisions.
Examples include:
- A new product launch
- A major business contract
- Quarterly financial results
- A change in company leadership
- A merger or acquisition
- Regulatory action or a legal dispute
- A dividend announcement
Positive news may increase buying interest, while negative news may encourage selling.
However, do not buy a share simply because you saw exciting news on social media. Verify important information using reliable sources and official company announcements.
Factor 4: Industry Conditions
A company does not operate alone. Its industry also matters.
For example, a decline in travel demand could affect airlines, hotels and travel companies.
A rise in raw material costs could affect manufacturing businesses.
A new technology might help some companies while creating challenges for others.
When studying a company, try to understand what is happening in its industry and whether those changes could affect its business.
Factor 5: Economic Conditions
The wider economy can influence share prices.
Important economic factors include:
- Interest rates
- Inflation
- Economic growth
- Consumer spending
- Government policies
- Currency movements
- Global economic developments
For example, higher borrowing costs can make loans more expensive for companies. Some businesses may delay expansion or spend more money on interest.
However, the effect depends on the company and the circumstances. A change that hurts one business may benefit another.
Factor 6: Investor Sentiment
Investor sentiment means the general mood or attitude of investors toward the market or a particular company.
When investors feel optimistic, they may be more willing to buy shares.
When they feel worried, uncertain or fearful, they may sell shares or avoid buying.
Imagine that investors are worried about a global economic slowdown. They might sell shares across several industries, including companies whose businesses are still performing reasonably well.
This helps explain why a company's share price can fall even when the company itself has not announced any major problem.
4. Why Can a Share Fall Even When the Company Makes a Profit?
This is one of the most important questions for a beginner.
Suppose ABC Foods reports a profit of ₹100 crore.
That sounds positive, doesn't it?
But imagine that investors expected a profit of ₹150 crore.
The actual profit is positive, but it is lower than expected. Some investors may become disappointed and sell their shares.
The price may fall even though the company has made a profit.
Now consider the opposite situation.
ABC Foods reports a profit of ₹120 crore when investors expected only ₹90 crore. The results are better than expected, so buying interest may increase.
The share price could rise.
Remember: Investors often react not only to the result itself, but also to how the result compares with their expectations.
5. Why Can a Good Company Have a Falling Share Price?
A good company is not automatically a good investment at every price.
Imagine that ABC Foods is a well-managed business with growing sales and profits.
Many investors are excited about its future. As a result, its share price becomes very expensive compared with its earnings.
Later, the company reports good results, but those results are not as impressive as investors expected.
The share price may fall because investors had already paid a high price based on optimistic expectations.
This is why beginners should learn to examine both:
- The quality of the business: Is the company financially sound and able to compete?
- The price of the share: Is the current market price reasonable in relation to the business and its prospects?
A good business can still be a risky investment if you pay too much for its shares.
6. Why Do Share Prices Sometimes Rise and Fall Every Day?
Share prices can change throughout a trading session because buyers and sellers continually place orders.
For example:
- At 10:00 a.m., a share trades at ₹500.
- At 11:00 a.m., more buyers are willing to pay higher prices, and it trades at ₹510.
- At 1:00 p.m., new information creates uncertainty, and it trades at ₹495.
- At 3:00 p.m., buying interest returns, and it trades at ₹505.
These prices are imaginary and are used only to explain how movement works.
Daily price changes can be caused by company announcements, economic news, large orders, investor expectations and many other factors.
A small daily decline does not necessarily mean that you made a bad investment. Likewise, a sudden rise does not automatically mean that a share is worth buying.
7. What Is the Difference Between Price and Value?
This is a concept every investor should understand.
Price is the amount at which a share trades in the market.
Value is an estimate of what the business or share may be worth based on factors such as its earnings, assets, future prospects and risks.
Suppose two companies have shares priced at ₹100 and ₹1,000.
Does the ₹100 share automatically offer better value?
No.
The ₹1,000 share could belong to a company with stronger earnings and better future prospects. Alternatively, it could be overpriced. The same questions apply to the ₹100 share.
You cannot judge an investment simply by looking at its share price.
You need to study the company's financial performance, number of shares, growth prospects, risks and valuation.
We will learn more about these topics in future lessons.
8. How Should a Beginner React When a Share Price Changes?
Suppose you buy 10 shares of ABC Foods at ₹500 each.
Your original investment is ₹5,000.
After one month, the price falls to ₹450, and your holding is worth ₹4,500 before charges.
You now have an unrealised loss of ₹500.
What should you do?
Instead of panicking, ask yourself:
- Why has the price fallen?
- Has the company announced any important news?
- Are its sales, profits or financial position getting worse?
- Has the entire stock market fallen?
- Is my original reason for buying the share still valid?
- Does this investment still match my financial goals and risk tolerance?
Your answers can help you review the investment logically.
Do not automatically sell every time a price falls. But do not keep holding a share simply because you hope its price will return to your purchase price.
Likewise, do not assume that a rising share must continue rising.
There is no guaranteed way to predict short-term price movements.
9. Three Beginner Mistakes to Avoid
Mistake 1: Buying Because Everyone Is Talking About a Share
You may hear friends, relatives or social media creators discussing a share that has recently risen sharply.
Do not buy simply because other people are buying.
First understand the business, its financial position, the price you are paying and the risks involved.
Mistake 2: Checking the Share Price Every Few Minutes
Frequent price checking can make beginners anxious and encourage emotional decisions.
If your goal is long-term investing, focus on the company's business performance and review your investment according to a sensible schedule.
This does not mean ignoring serious company news or risks.
Mistake 3: Assuming That a Low Price Means a Bargain
A share that falls from ₹500 to ₹100 is not automatically cheap.
The decline may reflect serious problems in the business, lower expected profits or other risks.
A falling price can create an opportunity in some circumstances, but it can also signal that the investment has become less attractive.
Research before making a decision.
10. A Simple Checklist Before Reacting to a Price Change
Before buying more shares, selling or deciding to continue holding, ask:
What caused the price change?
Is the information reliable?
Has the company's business performance changed?
What is happening in the wider market and industry?
Does the current price make sense in relation to the company's prospects?
Am I making a decision based on research or fear and excitement?
Can I afford the risk of keeping this investment?
You do not need to answer every question perfectly on your first day. Learning to ask the right questions is an important first step.
Important Stock Market Words to Learn
| Word | Simple meaning |
|---|---|
| Demand | How strongly buyers want to purchase shares |
| Supply | Shares available from sellers at different prices |
| Volatility | How much and how quickly prices fluctuate |
| Investor sentiment | The mood or attitude of investors |
| Earnings | A company's profit over a period, measured according to the relevant accounting basis |
| Expectations | What investors believe may happen in the future |
| Valuation | An estimate of what a company or share is worth |
| Market correction | A meaningful decline in market prices after a rise; the term has no single universal threshold |
| Unrealised loss | A decline in the value of an investment that you still hold |
| Realised loss | A loss confirmed when you sell an investment for less than its purchase cost, before applicable adjustments |
Frequently Asked Questions
1. Who decides the price of a share?
The market price is formed through buyers' and sellers' orders on the stock exchange. Their willingness to buy and sell at different prices determines the prices at which trades occur.
2. Can a share price fall to zero?
In extreme circumstances, a company's shares can lose nearly all their value or become worthless, such as when a business fails and shareholders receive nothing from the remaining assets. Investors should never assume that a share will eventually recover.
3. Why do share prices change even when the stock market is closed?
Company announcements, global developments and other information released outside trading hours can change investors' expectations. When trading resumes, those expectations may be reflected in the opening price.
4. Should I buy a share when its price falls?
Not automatically. First investigate why the price has fallen and whether the business remains financially sound. A lower price alone does not make a share a good investment.
5. Can I predict tomorrow's share price?
No one can predict short-term share prices with certainty. Research can help you understand a company's business and risks, but it cannot remove uncertainty.
6. Is a rising share always a good investment?
No. A share can rise because of changing expectations or market excitement and still be expensive relative to the company's financial performance and prospects.
Your Learning Challenge
Let's practise what you have learned.
Imagine that ABC Foods' share price rises from ₹500 to ₹550 after the company announces that its profits have increased.
Write down your answers:
- What is the percentage increase in the share price?
- What might have encouraged investors to buy?
- Does the price rise guarantee that the share will continue rising?
- What would you research before deciding whether to buy the share?
Answers: The share price increased by 10%. Improved profits may have encouraged buying, particularly if the results were better than expected. However, the increase does not guarantee further gains. Before buying, you should examine the company's financial performance, future prospects, valuation and risks.
Conclusion
Share prices rise and fall because buyers and sellers respond to company performance, expectations, news, economic conditions and investor sentiment.
As a beginner, you do not need to predict every price movement. Instead, learn to understand the business behind the share, investigate the reasons for price changes and make decisions based on your goals and risk tolerance.
Keep this principle in mind:
Do not buy only because a share is rising, and do not sell only because it is falling. Understand the reason before making a decision.
Explore These Posts to Understand the Topic Better:
- [Part 1: What Is the Stock Market?]
- [Part 2: What Is a Share? Understanding Company Ownership]
- [Part 3: How to Buy Your First Share]
In the next lesson of the Stock Market Academy, we will explore Part 5: Investing vs Trading — What Is the Difference, and Which Approach Fits Your Goals?
Keep learning, stay patient and build your financial knowledge one step at a time.
Call to Action:
Have you ever wondered why a share price rises or falls? Share your question in the comments, and continue learning with the next lesson in the Stock Market Academy on Aparichita.