How are stock prices determined?
I understand that by buying stocks you are essentially buying a part of the company and thus more profits for the company better the stock price. But then, is it also not determined by demand and supply? (More people buy the stock the higher its price).
My main question: Does this essentially mean that if a company is going into losses (technically its stock price should fall) but for some reason a lot of people are continuing to invest into it (keeping the demand high) mean that the share price continues to rise? Finally, does this mean stock price is determined by the mentality of people who are investing into it and not the company itself?
A simple way to put it: stock prices are determined by the price people buying/selling the stock value it.
In technical terms, It’s a market. You have people bidding for shares, and people trying to sell shares. The market is formed by this dynamic, where buyers generally bid lower than sellers ask for the shares, and the resulting price of the stock lands somewhere in the middle.
Example: I’m selling a Lolapalooza ticket on craigslist and asking for $500. Someone offers to buy it for $300. We compromise and I sell it for $400.
If people believe the company will perform better, they will be willing to pay a higher price for the stock.
In the long term, the reason why somebody would want to hold a stock for a company that is doing well is because they expect to have a cash flow from that company such as stock buybacks from the company or dividends. That is the more intrinsic reason. Theoretically, if a company never ever had or planned to have any cash flows to stock holders, then there would be no fundamental reason to buy its stock.
The thing is, that is really just for long term investors. Most people will invest due to the sentiment of the market.