Why Share Prices Fluctuate | For Beginners |

Why and How Share Prices Increase or Decrease in Stock Markets. We see constant fluctuation in Share Prices and they keep increasing and falling every single second. Most people have no clue what does all this. Frankly, share prices are determined by complex algorithms. However, For Beginners, there is one important factor that fluctuates share prices making them go up in value or fall down in price. This Article is for beginners who can learn the reasons for Share fluctuations in 5 Minutes.

Why Share Price Fluctuates

Below, we will explain this phenomenon in very easy language by taking a small example and illustration.

For Example: The current market price of Apple share is Rs.100. and there are total of 1,00,000 share in Apple. This makes that total net worth of Apple Rs.1,00,00,000 ( 100 X 1,00,000)

First, lets meet two parties in every share trading, Sellers and Buyers.

Lets first talk about Sellers. Sellers are the people who already own a company’s shares and are looking to sell them in Stock Markets. So, when a seller wants to sell a share, he want to sell at a higher price than for what the share is available now (100).

For example, if i have 1,000 Apple Company shares, i want to sell it for higher price only. So, i will tell by broker to sell the shares only when the Market price of the share reaches 120. I don’t want to sell it for any lesser price. Just like me, all the sellers wants to sell their shares at high price only.

Each seller across the country fixes a price at which they wants to sell their shares. So, the table showing Share available for Sale looks like this:

Seller Name No of Shares they wants to sell Sale Price
Myself 1,000 Rs.120
X 2,000 Rs.122
Y 1,500 Rs.125
X 2,200 Rs.130
W 3,000 Rs.135

 

Just like there are sellers, there will be buyers who wants to buy the shares of Apple. A Buyer always wants to buy a share at lesser price.

So, a Buyer named “Thomos’ tells his broker to buy the Apple Share only when it falls from the current price (100) to 90. Just like him, all buyers across the country wants to buy shares at lesser price only.

So, the Buyers table will look like this:

Buyer No of Shares they want to buy Sale Price
Thomos 1,000 Rs.90
Mark 2,000 Rs.85
Ravi 1,500 Rs.82
Salman 2,200 Rs.80
Rakesh 3,000 Rs.78

 

Now, this is a deadlock. I don’t want to sell my shares at any price less than 120 and there is no seller who wants to sell shares at less than 120 either (see the table). Similarly, thomos will not buy shares unless it falls to 90 and so is the other buyers.

Sellers dont want to sell their shares at any lesser price and buyers don’t to buy their shares at any higher price. How will the share trading happen now?????

Now enters the most important people in the stock markets. These are not listed sellers or buyers. A need makes them to buy shares at lesser prices or sell the shares at lower price.

Say for example, My name is Chris. I have 1,000 shares in Apple. Today morning, i dad met with an accident and was admitted to hospital. I immediately need money. I want to sell my shares.

Like other sellers, i don’t have time to quote a higher price and wait until the share price increases. I urgently need a buyer. So, i will see the buyer table. Thomos wants to buy shares at 90. The current market price of the share is 100. Now, i cant bargain but sell the shares to Thomos. I will sell all my shares for 90,000 (90 X 1,000). This has incurred me loss, but, i dont have a choice.

Now the final stage. Lets see how this single transaction between Thomos and Chris effects the share price.

Before the share transaction, the total net worth of the company is 1,00,00,000 (100 X 1,00,000).

What happened after this transaction: 

1,000 shares were sold at 90, and other 99,000 shares in the company were still 100 only.

So, the total net worth of the company now is:

(99,000 X 100) + (1,000 X 90) = 99,90,000

New Share Price is 99,90,000/1,00,000 = 99.99/-

See how a single transaction has brought down share price from 100 to 99.99. This may be negligible but, when there is heavy selling, the share price will drop much more.