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Why Prices Move Up and Down

Your high school teacher was right: microeconomics is built on two principles – supply and demand. As demand (the number of people who want something) increases, price increases and as supply (the amount of something that’s available) increases, the price decreases.

Supply and Demand

Think of bubble gum. If bubble gum suddenly became incredibly popular, bubble gum sellers could charge more (making Willy Wonka very happy). On the other hand, if no one wants bubble gum, they would have to charge much less to entice people to buy.

Now think about oranges. Imagine the world’s supply of oranges decreased. Oranges would become more rare, therefore more valuable. Grocery stores and markets would therefore charge more for them.

The same goes for prices in the stock market. Think about IBM stock. If there are more people buying IBM (demand up) than there are people selling it (supply down), IBM shares will become more valuable driving the price up (just like the oranges). If there are more people who want to sell IBM shares (supply up) than there are people who want to buy them (demand down) IBM shares will drop.

Feeling dizzy yet? Just remember: Each upward movement means more people are buying than selling, each downward movement means more people are selling than buying.

This is why stock prices are always changing. Millions of traders around the world are constantly buying and selling stocks, changing supply and demand. When supply equals demand, we reach what is known as market equilibrium. This is considered the true price, since both the buyer and seller are satisfied.

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