Unpacking the Underlying Logic of Stock

Unpacking the Underlying Logic of Stock Market Volatility: The Truth About Indices, Stock Prices, and Predictions

 

In stock market investing, the most common questions for beginners often revolve around volatility itself: Why do indices rise and fall every day? What drives stock prices to fluctuate? Who determines those specific price levels? And why is there never a "foolproof" way to predict them? These questions may seem complex, but they all have answers when you break down the underlying logic of how markets operate.

 

Let's start with changes in stock market indices. The indices we track daily—such as the Shanghai Composite Index, Shenzhen Component Index, or the U.S. Nasdaq Composite—are essentially "collective representatives of a basket of stocks." When an index is constructed, different weights are assigned to its component stocks based on factors like market capitalization and stock price. The final index level reflects the average change in the overall price or market capitalization of these component stocks. For example, the Shanghai Composite Index includes a large number of listed companies in China's Shanghai stock market: if most of these companies see their stock prices rise and market capitalization increase, the index will climb accordingly; conversely, if component stocks generally fall, the index will decline. Thus, index movements are not isolated events—they are a concentrated reflection of supply-demand dynamics, capital flows, and investor sentiment across the broader market or specific sectors, acting as a "barometer" of the market's overall health.

 

Next, let's delve into the core logic behind stock price fluctuations. The direct driver of stock price movements is an "imbalance between buying and selling pressure." Stock trading, at its heart, is a game of supply and demand: when there are more buyers (buying pressure) than sellers (selling pressure), buyers will be willing to pay higher prices to secure shares, pushing the stock price up; on the flip side, if selling pressure outweighs buying pressure, sellers will have to lower their prices to offload shares, causing the stock price to drop. Behind these shifts in buying and selling power, two key dimensions come into play: fundamentals and sentiment. Fundamentals serve as the "anchor of a stock's intrinsic value," encompassing factors like a company's profitability, revenue growth, industry prospects, as well as macroeconomic conditions (e.g., interest rate adjustments, GDP growth) and industrial policies (e.g., subsidies for new energy, new industry regulations). For instance, if a company releases its annual report showing a 50% year-on-year increase in net profit—far exceeding market expectations—investors will perceive the stock as undervalued, triggering a surge in buying that drives up the price. Sentiment and capital flows, meanwhile, have a greater impact on short-term volatility. Market panic or optimism, large-scale inflows or outflows of institutional capital, shifts in northbound capital (foreign capital flowing into Chinese markets), and even speculation around trending concepts can cause stock prices to deviate from their fundamentals in the short term. A classic example is when a stock suddenly becomes associated with a "hot AI concept": even if the company has no actual business ties to AI, speculative capital can still push its price up sharply in a short period.

 

As for specific stock price levels—say, a stock showing "$15.80"—this number is not determined by any single institution or individual's subjective decision. Instead, it is locked in by "the price of the last real-time traded transaction." On the stock exchange's matching system, countless investors submit buy and sell orders every moment: if someone places an order to "buy 1,000 shares at $15.80" and another places an order to "sell 1,000 shares at $15.80," the system will match these two orders, the transaction will be completed instantly, and the stock price will be fixed at $15.80. The next second, if a buyer is willing to purchase shares at $15.90 and a seller accepts that price, a new transaction will occur, updating the stock price to $15.90; conversely, if a seller lowers their price to $15.70 to close a deal, the stock price will fall. Every real-time price level is a momentary result of supply and demand reaching a balance in the market.

 

Finally, why is the stock market so hard to predict? The core reason is that predicting stock prices or indices essentially requires predicting "all future factors that affect supply and demand"—and these factors have three inherent uncertainties. First, "information is inexhaustible." There are too many variables influencing stock prices: from company-specific surprises (e.g., executive resignations, product quality issues) to macro-level unexpected events (e.g., geopolitical conflicts, natural disasters), and even unsubstantiated rumors. No one can grasp all this information in advance or accurately predict its impact. Second, "sentiment is unquantifiable." Market sentiment is a collection of investors' subjective psychology—fear, greed, hesitation—and it shifts constantly in response to events. It cannot be precisely calculated using formulas or models: the market might rise optimistically due to good news one day, only to sell off collectively out of panic the next. Most critically, "predictions themselves affect outcomes." If most investors believe "a stock will rise to $20" and buy in advance, the surge in buying pressure will push the stock price to that target ahead of schedule—even overextending future gains. This leads to the phenomenon of "good news leading to a price drop" (as the upside is already priced in), rendering the original prediction invalid.

 

Understanding this underlying logic is not about finding a "shortcut to predicting the market," but about viewing market volatility more rationally. Investing is not about gambling on short-term price swings; it is about understanding market rules and making decisions that align with your risk tolerance. This, perhaps, is the best way to navigate the uncertainties of the stock market.