I’ve read about these concepts and constantly hear them but I still don’t understand how money/assets fluctuations happen
In: Economics
Supply and demand. When people purchase stocks, the value typically increases. When they sell, they go down. When people panic and sell it all, they crash.
Currency is much more detailed and, quite honestly, I don’t know enough about currency fluctuations to reach it to anyone, so I’ll let a more familiar commenter give it a whirl.
The value of stuff changes over time because the demand for it changes.
Investments are denominated in a particular currency. For example, if you own US government bonds or stocks that trade on a US exchange, you’re going to get US dollars back when you sell them. So if you’re feeling less confident in the value of the US dollar, it makes all US dollar investments seem more risky, and you’re more likely to sell your US dollars for another currency and invest somewhere else.
Why might your opinion of the US dollar change? Well, the economy of each country changes over time, the government changes and its policies change, and the total number of available dollars changes too. So it’s natural that your opinion of it will change.
Tourism is another reason you might want to buy a particular currency, and demand for that can change over time too.
Same with companies. The company changes over time as revenues and expenses change over time, and if it appears more valuable then there will be more demand for the shares. If it appears less valuable, there will be fewer people buying shares and more people selling shares.
The value changes because fundamentals change. Stock value rises because a company is earning more; the USD rises against the JPY because the US economy is doing better (both very simplified examples).
The price, which is different from value and is what you see fluctuating day to day, changes because there was a buyer and a seller that transacted at that time. Someone thought the value of Nvidia would increase so they paid price x, and someone sold it at price x because they didn’t have the same view/any other reason. This happens over and over again with different market participants for different reasons at different prices – hence the fluctuations.
It’s all Supply & Demand. But more specifically, it’s thousands of “Bid and Asks” little offers going on every second. If theres more people bidding than people selling (or “asking), the price of the stock will move up a little so it becomes even.
The value of stocks and “stuff” depends on how much people want it and how much supply is available. If many people wants the good, the seller can raise the price and people will still want it. If there is many sellers selling the same good, the seller will need to lower the price to stay competitive. This includes tangible goods and intangible goods like stock. This is the very basics of supply and demand.
Currency operates in the same manner. Currency has a value because there are multiple currencies, and the not so obvious point that if you want to trade in a particular country, e.g. US, you need US dollars. So if businesses from foreign countries want to trade with US they need US dollars and that forms a demand. Now the same supply and demand can apply.
In 1890, *Amalgamated Buggy Whips* was a great investment to capitalize on the growing demand for horse drawn transport. You want in on the action and want to own part of that company. Because other people also want that stock, the price will be very high – supply and demand.
You might pay a premium to buy that stock so you could receive dividends from their large sales of whips and whip accessories to horse owners.
But by 1930, the demand for those items has crashes, so you would want to sell, but because nobody else wants to buy, the price is very low – supply and demand.
While there are certainly manipulations and illegal things that happen, the actual prices paid are pretty much supply and demand driven. If there are more shared offered than people want to buy, the price will fall. If there are more buyers than sellers, the price will raise.
Say you bought a piece of land. Then you landscaped it and built a house on it. Now you want to sell the land and the house – would you expect to sell it for more than you purchased it initially?
This is basically the concept. Currency, stocks and stuff change over time because stuff happens. Sometimes deliberately, like improving it by building something on it, sometimes accidentally (say you discovered gold on the land). Value can also go down – say a fire burnt down a house and now only the land remains.
Currencies work at the level of countries, stocks work at the level of companies. But the basic idea is the same.
It’s easier if you don’t think of stocks as “a piece of paper you buy and hope it increases in value” but rather “a percentage of a company”. My buddy Dave has an ice cream truck. His ice cream company needs money so he splits the company into 1000 shares and sells some of them for $10 each. This means his company is valued at $10,000. If I buy a share, I literally own 1/1000 of his company.
A few months later, it is a hot summer and the truck is becoming famous. It makes more money. The company is worth more money than before. Say, $20,000. That means my 1/1000th of the company is worth $20.
Now I hear rumors about a proposed new sugar tax. It will make ice cream more expensive. I fear that the ice cream trucks will not make as much profit if that happens, so I try to get rid of my share. Problem is, other people have heard the rumors too, and no one is willing to pay $20. The most I get offered is $15. Suddenly, the ice cream company is only worth $15,000.
That is the point of fluctuations. A share is, by definition, worth what someone is prepared to pay for it right now. When people have less money, they buy fewer stocks. When interests go down, it is easier to borrow money to buy stocks, so more people want to buy stocks. Then stocks get more expensive. At every given moment, there are a lot of different things affecting both the stock market in general and specific stocks in particular.
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