You already know that investment prices constantly fluctuate, and that this happens more sharply for some investments than for others: the more an investment's price swings, the riskier it is. This constantly changing price is called "the price" (or "market price"). In this lesson you'll learn how it comes about.

What determines the price?

How a price comes about partly depends on what you're investing in, but supply and demand always play a role. Take stocks: if there's high demand for a specific stock, its price will rise. If demand for a stock drops, its price falls.

Depending on the type of investment, other factors can also influence the price. For bonds, for example, that's the interest rate. If interest rates rise, the price of the bond falls. And conversely: if interest rates fall, the price rises.

Forces behind the price

Supply and demand in investment markets don't come out of nowhere. There are roughly two driving forces behind them. First, there are investors' expectations about specific investments. Second, the state of the (global) economy plays a role.

Investor expectations

For simplicity, let's zoom in on stocks. If investors expect a company to grow (soon), that company's stock becomes more popular: demand rises, and so does the price.

If investors expect the opposite, shrinkage or stagnation instead of growth, the stock becomes less desirable. Demand falls, and so does the price.

This dynamic between investor expectations and price doesn't only apply to stocks, it plays a role in every type of investment. What differs per type of investment is what investors base their expectations on.

State of the economy

Supply and demand are also shaped by the state of the (global) economy. To estimate how prices will develop, analysts look at a wide range of factors, such as economic growth figures, central bank policy, inflation, unemployment, job growth, and consumer and producer confidence.

Major world events can also affect stock prices. You may remember the start of the COVID-19 pandemic: amid all the uncertainty at the time, stock prices dropped sharply in February 2020. But they recovered quickly afterward, and a period of growth followed.

In general terms, uncertainty has a negative effect on stock prices. When uncertainty fades, prices often recover as well.

Key takeaways

• The price of an investment is what you can buy or sell it for
• Investment prices fluctuate constantly: they can rise and fall
• Prices are mainly determined by supply and demand
• Investor expectations and the state of the global economy determine whether demand is high or low.