How Share Prices Are Determined: Supply, Demand and Investor Behaviour
A share price is determined by supply and demand. When more investors want to buy than sell, the price rises. When sellers outnumber buyers, the price falls until the market finds a new balance. Investors set their buying and selling limits using available information about a company’s future earnings, risks and expected cash flow. The efficient market hypothesis argues that stock prices usually reflect this information, although new information can cause prices to move unexpectedly. In reality, markets are not always fully rational. Fear, optimism, rumours and the expectation that another buyer will pay more can push prices above or below a company’s underlying value. This is especially relevant in markets where information is unevenly shared.
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