What Makes Stock Prices Fluctuate
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.
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This page is part of Investing Lesson 2 - What Makes Stocks Become Over or Under Valued. If you have already read this lesson, you can skip directly to the Investing Lesson 2 Quiz.
