Wednesday, 21 October 2015

why does share price of a company fluctuate in share market?

let's take a simple example.
let us assume a country called RICE-LAND.
everyone in this country eats only rice. Some farmers produce only rice.
In economics, price of any good depends on supply and demand.

Now, lets assume meteorological department of country predicts that there is not going to be enough monsoon this year. So people in this country will face food shortage in coming time. So people will go in market and purchase extra rice than they need . Thus they create extra demand and food price will shoot up.

Similarly, if meteorological dept. says that there is going to be enough monsoon  then rice price is going to be stable or will slightly go down. Because there will be enough rice in the market and people won't think that there is going to be a shortage in the near future.

Same phenomenon occurs in the share market. If people feel that due to certain market conditions company is going to make huge profit in the future then they start buying that share. Thus the demand of the share increases. And hence the price also increases.

 

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