How Shares go Up and Down in a Jiffy! 

So you’re fascinated by the share market. But, you’re wondering how shares go up and down so frequently. 

In this short article, I’ll cover how shares go up and down in the short as well as long term. As a bonus, I’ll also share how you can make money from it. 

So, let’s not waste any time and get right into it! 

 

How shares go up and down
Source: Crestmont Research

 

Shares are pieces of a company listed on the stock market. People can own shares and be part-owners of the company. 

But these shares can be bought and sold on a regular basis. So the price of a share depends on the number of buyers and sellers in the market. More the buyers, higher the price, more the sellers lower the price. 

Theoretically, this is how share prices go up and down. But, let’s understand this better with an example.

Example: 

Imagine that you bought a Pen for Rs.100. 

But, there is something special about this pen. It will never run out of ink.

 

How shares go up and down

 

You never forget to mention this quality of your pen whenever you use it in front of someone. 

Thus, many people get to know about this pen through the people who’ve seen you use it. 

Now, there are people who want to buy this pen from you. 

Mrs. Shruti, your neighbour, gives you an offer. She will buy it for Rs. 200 from you. Since you’re getting double of what you paid for it, you sell it. 

How shares go up and down
Source: Shutterstock

Mr. Ajay comes up to Mrs. Shruti and offers to buy it for Rs. 220. Mrs. Shruti refuses and counters him with an offer to sell at Rs. 240. 

Mr. Ajay agrees and buys the pen from Mrs. Shruti. 

One day Mr. Ajay was using the special pen to note something down in a Kirana store. Suddenly, the pen stopped writing. It started writing again after Mr. Ajay shook it a couple of times. But, the damage was done. 

Mr. Ajay was shocked. His trust was broken. He believed that the pen could never run out of ink. But now he doubted this belief. 

How shares go up and down
Source: Clipart Library

 

So he went out to sell this pen. He offers to sell it to the Kirana store owner, Mr. Ramesh, for Rs. 240. Exactly what he paid for it because he wants to get rid of it now. 

But Mr. Ramesh had noticed that the pen stopped working for a bit right in front of him at his Kirana store. He still thinks that it was a minor glitch in an otherwise special pen. 

He doesn’t buy it at Rs. 240 but he’s willing to buy it for Rs. 150. 

Mr. Ajay agrees because for him it’s a normal pen now. And 150 is a really good price for a normal pen. 

But 2 days after Mr. Ramesh bought it, the pen stopped working again. It started writing after Mr. Ramesh shook it. But now, his trust was completely broken. 

So he sells it to his friend, Mr. Vivek, for a meager Rs. 50. It was a good smooth pen. Thus, even if the ink runs out eventually it was worth Rs. 50. At least, that is what Mr. Vivek thought while buying it. 

But the pen keeps writing for months, standing up to its quality of never running out of ink. So someone again offers to buy it for Rs. 150. 

Another someone offers to pay 200. 

How shares go up and down

This keeps going on. The pen keeps changing owners and the price keeps going up and down. But after it was firmly established that the ink doesn’t run out, the pen never sold for less than 250. 

Relating it to the Stock Market: 

Now, imagine that the offers made for the pen are not monthly but daily. Or even more frequent, every minute. 

Every minute someone makes an offer to buy or sell that pen. People aren’t even using the pen anymore. They are just trying to make money off it by buying low and selling high. 

This is exactly how the stock market works. And this is exactly how shares go up and down so frequently. 

How shares go up and down
Source: Investopedia

In well-known and big companies, every second there is a buyer or a seller. Computer algorithms determine the price based on the offers made by buyers and sellers. For every seller, there has to be a buyer for the exchange of shares to happen and vice versa. 

You can influence the prices of a company single-handedly if you own a huge percentage of shares of the company. 

To understand how the stock market works, you can read my article about it here. I’ve explained it in detail using another familiar example. 

How do people make money from it? 

There are many investors who have made a huge fortune for themselves just by investing in shares. You can check out the list of world’s top 10 richest investors here

How shares go up and down
World’s Richest Investor, Warren Buffett. Source: The Economic Times

 

Once a company is established and grows its profits every year, its prices also go up in the long run. 

People do short-term price trading as well. But only 1% of the short-term traders make any money. So why would you want to do something in which the odds are stacked heavily against you? 

The richest investors have made money in the long run. They haven’t made money betting on the share prices going up in the short term. They’ve made money betting on the companies earning money in the long run. Because rising profits eventually lead to share price gains as well. 

But for you to take advantage of share prices going up, you need to learn first. 

You have to understand the stock market. You have to understand how companies work. And you have to understand how to value those companies. 

You can read my articles covering various topics on the stock market here

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