three case of price fluctuation

Equilibrium stock price fluctuations

This particular stock theory explains how the stock price of a large, publicly held corporation is
determined in times without changes in corporate control and without speculation. The central
idea is that the stock price is determined by some weighted average of investment acts from
investors applying informational diversified investment strategies. The dynamics behind the
price fluctuation is as follows: The higher the share of uninformed investors, the more uncertain
the market price is relative to the fundamental stock value. This compares to larger fluctuations
around this fundamental value and/or more frequent fluctuations. The picture is reversed when
the share of informed investors increase and/or this share become better informed. In the
exhibition the fluctuations are smooth. However, this needs not be the case. The fluctuation may
be much more irregular. One should remember that the advantage of being an informed investor
is to be more able to buy cheap and sell expensive because they have a better idea about the
fundamental value of the stock. It should be obvious that this advantage increases the more the
actual stock price fluctuates around the fundamental stock value. Altogether, this suggests that
there exist an equilibrium stock price associated with a particular level of fluctuations around the
true stock value. The text below explains that this equilibrium level of price fluctuations is
restored if it is disrupted for some reason. Two cases must be considered; one with excessive
fluctuation and one with understated fluctuation.

Disequilibrium (excessive) stock price fluctuations

Imagine that the market price for some reason begins to fluctuate more than its equilibrium level.
This is illustrated in the exhibition by the large swings. This implies that the informed investors
start earning abnormally high returns on their investments because the average benefits from
being informed increases and the average cost of being informed remains the same. Furthermore,
the uninformed investors bear the full burden of the higher risk following higher degrees of
fluctuations, and they face lower mean returns because the higher returns the informed investors
are making have to come from lower returns made by the uninformed investors. The higher risk
does not hit the informed investors equally hard because they are more able to buy when the
price is low and sell when it is high. They are therefore able to avoid some of the negative risk
while maintaining most of the positive risk. Therefore as time passes, some investors discover
that it pays to pursue informed investment strategies and the share of informed investors starts to
increase. This mechanism restores the equilibrium fluctuation level.

Disequilibrium (understated) stock price fluctuations

Consider the situation where the market price starts to fluctuate less than the equilibrium level.
This situation is illustrated by the small waves in the exhibition. In this case, the benefit from
being an informed investor fall but the cost remains the same so that informed investors begin to
earn abnormally low profits. At the same time the uninformed investors benefit from the reduced
risk that follows less fluctuations. This benefit is larger than the benefit that accrues to informed
investors because the latter already has an advantage in handling risk (see above). The result is
that the share of uninformed investors begins to rise at the expense of informed investors, and
this process restores the equilibrium level of price fluctuations.

Stock prices change every day according to the markets activity. Buyers and sellers cause prices
to change and therefore share prices change as a consequence of supply and demand. And it's
this dance between buyers and sellers, supply and demand that decides how valuable each share
is.

If more people want to buy a share than sell it, the price goes up. Conversely, if more people
want to sell a share than buy it, there's more supply (sellers) than demand (buyers), and the
price goes down.

Shares represent ownership in a company. So even if you own just one single share of a
company, you own a part of it no matter how minute. Therefore, the price of a share indicates
what investors feel the company is worth.

Stock prices can stay stable for months or fluctuate wildly which is referred to as volatility.
There are hundreds of variables that drive stock prices, but the most important one is earnings.
Attributable earnings can be described as the profit of a company after taxes and all other
deductions i.e. it's the net profit.

There's often the misconception, especially with beginners, that a share that has risen will
always fall, or a share that has fallen will always rise. Vice-versa, there's also the misconception
that a share that has risen will always continue to rise. This is not the case though! Stock prices
reflect the interest of investors, not the law of gravity!

However, no market operates in a vacuum. In a borderless and interconnected world like the
stock market, the slightest rumour or threat of war, rising oil prices or interest rate hikes for
instance, can detonate a reaction on world markets which then react speedy and unpredictable.

To make matters worse, markets also react to less alarming news and events like a slip of the
tongue. One wrong word said by mistake by an analyst or politician can cause a chain reaction
and panic sending the markets into red territory.

But whichever way the wind blows, prices can rise as quickly as they fell especially after
someones blunder saying the wrong thing. Once investors come to their senses again the stock
markets can even begin to rise the same day again.

We may not be able to predict the forces that causes the markets to swing either up or down, but
by analysing and understanding them, we will be better equipped to weather the lows and wait
for the tide of fortune to turn.
It can definitely be said though, that it is important to always assess a company on it's
fundamentals. In the long term, good, solid and strong companies with good fundamentals
usually return to their real value and strength, ironing out speculations based on rumours and
innuendos.