What Makes Stock Prices Change
Suррlу and demand are at work in the stock market every minute it is open. Popular stocks will rise in value and unpopular stocks will fall. Popularity means that more people want to buy; their demand will drive up the price. You gain insights when you understand how and why a stock becomes popular.
Misconceptions about the Market
One attribute among stock market investors is a widespread belief that in some way, the market is predictable. More to the point, people want to believe that the future price of their stock choices can be predicted with enough reliability to ensure that they will undoubtedly make money. The desire to minimize the risk of loss—a legitimate concern—clouds judgment because, in fact, you cannot really predict with certainty which stocks will be profitable. So while a concern for risk is entirely appropriate, the methods for responding often are questionable.
If you apply a method of stock selection that is not logical or that is based on an interpretation of fact, then you have no right to expect consistent returns. Underneath all of the effort, you want to minimize the risk of loss. But if you don't believe in fundamentals, you need to use some other method. Technical indicators have such a large following because they are immediate, easy to understand, and reassuring. The belief that past trading patterns—whether viewed as statistical or visual—show the way to future price movement does not make sense to the fundamentalist. The accounting discipline tells us that economic forces determine the ultimate value of a company, that the value of a company creates the level of future earnings potential, and that future earnings potential determines whether a stock's value rises or falls.
KEY POINT
Technical indicators are popular because they are immediate, they are easily understood, and they are reassuring. Even so, they do not provide you with the kinds of information you can only get from the fundamentals.

As logical as it is to follow the fundamentals, they do not spark the imagination of the average investor. Most people don't want to become analysts, and number crunching certainly is seen as a dry and uninteresting activity. The problem is figuring out how to use the valuable information that comes out of financial modeling and forecasting, without having to give up your excitement about the market. Unfortunately, widely held beliefs get in the way of sensible analysis. Be aware of the following popular myths among investors.

KEY POINT
Whether we like it or not, market price movements are not predictable.

Market prices are predictable. "Herd mentality" is frequently used to describe overall market thinking. The herd mentality is invariably wrong, as the belief goes. It is not always true, but there is a tendency toward widespread short-term beliefs to be wrong. Thus, highly popular stocks may be about to lose market value because—again, according to this theory—by the time the "average" person believes, along with the majority, that a particular stock should be bought, it is already too late. In fact, you should do exactly the opposite of what the majority believes. If you subscribe to this theory, you are a contrarian.
Stock prices will continue going up indefinitely. Stock market investors are most often optimistic. This is reflected in the way financial news is reported. Listen carefully. When the market rises, it is a rally. The news is expressed in the most positive terms. But when the market falls, it is rarely reported in pessimistic tones, unless the fall is dramatic. Moderate falls are characterized as consolidations, reactions, or other cautiously phrased occurrences.
Today's price represents a low price. When investors first consider the market, they make the mistake of assuming that the current price of a stock represents the starting point, the low, the line against which future profits will be measured. Starting out on the premise that the current price is a low price is a way of assuming that once you buy the stock, it has to go up—because you are investing to make a profit.

Stock prices might move in either direction, often for reasons that cannot be predicted—or for no apparent reason at all.
The worst risk is missing the immediate opportunity. Many people fall into the trap of buying impulsively, out of a fear that they will miss an opportunity. This leads to poor decisions because real opportunities are found in long-term trends (fundamentals), and short-term price movements are just that—short term.
Prediction-making has intrinsic strategic value. Because so much effort is put into making predictions about overall averages and market trends, it is easy to fall into the mistaken belief that future prices and tendencies are predictable.
KEY POINT
Forecasting future price movements is a form of psychic activity. Many claim to have been right in the past, but the past, we must remember, is much easier to predict.

There is only so much capital, so winners and losers offset each other. One of the most baffling beliefs in the market is that for every winner, there is also a loser. This belief comes from the assumption that the free economy operates on a finite amount of capital.
KEY POINT
It is the nature of the capital market that profitable business activity actually creates more capital. This is where the real potential of the stock market exists for the average investor—buying into the stock of a strong growth candidate.