How Stock Prices Are Determined

how are stock prices determined

Economists and Wall Street experts would like you to believe that stock prices rise based on a companies financial growth prospects or it’s earnings. While these may be underlying factors on how stock prices are determined, if you have ever been investing when the markets are crashing, you will have noticed that even with great growth prospects, great earnings, great products, a companies stock will still go down.

The truth of the matter is, stock prices are driven by nothing more than supply and demand. How much supply is available on the market and what the demand is for that supply.

The demand can be increased if a company reports great earnings, but the demand can also be created by a revolutionary new product, or perhaps a new maverick CEO has taken over. I’ve even seen companies with terrible fundamentals go up just because they are in a hot sector and the top stocks got too expensive. Investors are looking for a cheaper alternative to the high flyers.

Your job as an investor is to find which stock will soon have a big demand. If the supply of shares in these companies are limited, the chances of it scoring a big gain are increased. I like looking for stocks that trade around 100,000 to 200,000 shares per day. If you can get in before the demand arrives, then you will be the one making the big profits.

One way to find a growing demand is with Mutual Funds. Funds usually buy many hundreds of thousands of shares in a company they like. They spread their purchase out over many months. All you have to do is find top rated mutual funds and see what they have bought recently. This is called “Institutional Sponsorship“.

You can also get a companies prospectus by call the companies Investor Relations Dept. Subscribe to a service that provides this service in a timely manner, IBD (Mutual Funds Top Buys And Sells) and Morningstar (Morningstar Direct) provide such services. Once you get in, watch the price rise as the mutual fund managers complete their position over time.

Stock investing is all about being the first investor to the party. Time it right and riches await you.

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