Explain the determinants of daily price changes of a stock market index of your choice - Coursework Example

Based on relevant literature and economic theory, this paper explains why there is stock market price change almost every day. Determinants of Stock Market Price changes The table given below is a summary of stock price changes of Apple Inc, American Express, Ameriprise Financial Inc, Noble Corp and Johnson and Johnson, extracted from Bloomberg.com. This table illustrates daily stock price changes for the above mentioned companies. According to economists, there are various reasons and driving forces for this stock market price changes.

  Apr-18 Apr-19 Daily Price Change Apr-20 Apr-21 Daily Price Change Apr-26 Apr-27 Daily Price Change Apple Inc 437.92 438.95 0.30% 439.3 448.21 2.00% 455.13 456.5 0.30% American Express 53.05 52.67 0.70% 52.67 52.83 0.30%       Ameriprise Financial Inc 69.7 70.1 0.60%       70.4 70.1 0.30% Noble Corp 46.79 46.82 0.10%       47.55 47.49 0.10% Johnson and Johnson 64.56 64.75 0.30% 65.11 65.44 0.33%       Source: Rose, April 19, 2011, Rose, April 21, 2011, Rose April 25, 2011 and Rose April 27, 2011 The major forces in the market are demand and supply and the same play significant roles in fluctuating the stock price too.

The above table shows that stock price of different companies change almost every day in different proportions. For instance, Apple’s share price change was 0.30% between April 18 and April 19 and 0.20% between April 20 and April 21. This change is the result of market forces namely demand and supply. In simple economic terms, if more people want to buy a commodity (share) than they want to sell it, then the price essentially increases. If more people want to sell it than buy it, then price conversely move down.

It is highly important to understand what makes people prefer a particular share to another one. People like a stock only when they get good and positive news about the company, such as company’s earning. Investopedia (2011) considers market capitalization and company’s earning as major measures that people value stock price of a company. The value of a company is perhaps its market capitalization which can be found by multiplying the stock price by the outstanding shares. For instance, a company that sells its share at $250 and it has 10,000 outstanding shares has considerably less value than a company that sells its share at $100 and has 30,000 outstanding shares (250*10,000 = 250,000 whereas 100*30,000 is 300,000).

People anticipate and even extensively go for studying the earnings or profitability of a company when they think to buy or sell its share, and if this causes them to buy more, as a result the demand will be more and the price will move up. If people find that company not to be profitable in long-run, they eventually will like to sell its shares and it will increases its supply causing price to decrease. Brigham and Houston (p. 10) explained that stock price changes over time as conditions change and investors obtain new information about a company’s prospects.

A good example that he mentioned was stock price variation of Apple Inc. Its stock price ranged from $77 to 4193 between 12 months in 2008 rising and falling as good and bad news about the company released. Stock Price change and Gordon Growth model Gordon Growth mod