Why do stocks go up and down?
I was motivated to major in Economics because I wanted to understand human behavior and how the world works. Especially things that don’t make any sense. It’s hard to find a better example than the stock market. There are hundreds of publications and TV networks and commentators that try to make sense of something that really seems to makes no sense.
But it actually does make sense. It’s just a kind of sense that’s difficult to accept especially if you’ve invested your retirement into the market.
Let’s start with things that are often cited as reasons for stocks going up or down:
- Company earnings
- News stories
- P/E ratio or other numerics
- New product introduction
- Layoffs
I could go on. But none of these directly causes a stock to go up or down. It’s easy to prove this by picking a company and looking at historical price moves based on one of the items above.…