High demand for a financial asset drives its price higher, but what causes that high demand in the first place?
It’s all about how investors feel:
- Market sentiment toward the financial asset.
- Market sentiment toward the industry.
- Market sentiment toward the stock market.
- Confidence in the economy.
The more confident investors are about a company’s prospects or the potential for positive developments, the more likely they are to want the stock. Conversely, a loss of confidence can lead investors to sell, pushing down the stock price.
If investors sour on an industry, every stock in that industry could suffer — regardless of how each individual company is doing.
Confidence in the stock-market can also push up demand and prices for individual stocks. If investors believe that stocks are a good investment, either because valuations are attractive or because the stock market has been trending upwards, an increase in demand for stocks can push up prices across the board.
The opposite is also true. A declining stock market can worry investor confidence and lead to more selling and lower stock prices, and high valuations can prompt some investors to buy fewer stocks or sell their holdings.