More of this Feature • Part 1: Lesson 2 Main • Part 2: Vocabulary & Intro • Part 3: What Drives Stock Prices • Part 4: Investor vs. Speculator • Part 5: Commodity Nature • Part 6: Temporary Problems • Part 7: Life • Part 8: Mr. Market • Part 9: Lesson 2 Quiz

Join the Discussion "My employer gives me the option of having money taken out of my paycheck and putting it in an investment. Is this a good idea?" Read More...

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Investing Lessons

From Other Guides • Understanding the PE Ratio • Investing Resolutions

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What Makes Stock Prices Go Up and Down

In the introduction to the first lesson. I wrote that the entire purpose of these essays was to reach the average investor that it is possible to look at the financial statements of a company and determine what the stock is really "worth". Ideally, the investor is looking for companies that are trading below their "true" (or intrinsic) value, with the belief that someday the market will realize these securities are undervalued and the stock will rise. This reveals one of the self-evident quirks of the stock market. Sometimes companies will trade for half their value, while at other times, they will trade for 2, 3, 5, 10, or 20 or more times more than they are really worth. While this creates wild price fluctuations (known as "volatility" in financial jargon), it is the very thing that allows us, as investors, to make money.

For a moment, we are going to discuss the 4 most common things that cause these price-swings. (In other words, we are answering the question "Why do the stocks of good businesses sometimes sell below or above their intrinsic value?) They are:
1.) The investor vs. the speculator
2.) The commodity nature of stocks
3.) Life (it sounds general, but it will make more sense later)
4.) Temporary Problems

First, let's look at the Investor vs. Speculator.

Next page > What is the Difference Between an Investor and Speculator? > 1, 2, 3, 4, 5, 6, 7, 8, or 9