Stock prices are set by what people think stocks are worth. Buying a stock is a bet that it will become more valuable in the future (and/or pay dividends). Even with the rise of algorithmic trading, those algorithms are betting the stocks are will rise in value. In theory the cost should be related to the fundamentals of the stock like the company’s revenue, but in practice they are also set by investor’s opinions about the stock’s future price.
So what causes stocks to go down is people thinking that stocks will go down, and selling before they lose any more money.
In the case of the AI stock bubble, it’s hard to know what will cause investors to say “this stock is likely to drop on value, or at least not grow as quickly as other investments I could make.” The fact that most AI companies are burning cash and not getting much revenue out of it hasn’t dampened the excitement yet, so I guess investors still believe there’s a way forward that will result in more revenue. Or at least they believe the hype cycle isn’t coming to an end so they’re holding on while the prices go up and hope to sell before their holdings lose too much value. It won’t pop until something deflates the expectations of enough investors to start a sell-off. What’s that going to be? Who knows. It might just be a herd mentality thing where a few people begin to sell and more people follow suit.
Stock prices are set by what people think stocks are worth. Buying a stock is a bet that it will become more valuable in the future (and/or pay dividends). Even with the rise of algorithmic trading, those algorithms are betting the stocks are will rise in value. In theory the cost should be related to the fundamentals of the stock like the company’s revenue, but in practice they are also set by investor’s opinions about the stock’s future price.
So what causes stocks to go down is people thinking that stocks will go down, and selling before they lose any more money.
In the case of the AI stock bubble, it’s hard to know what will cause investors to say “this stock is likely to drop on value, or at least not grow as quickly as other investments I could make.” The fact that most AI companies are burning cash and not getting much revenue out of it hasn’t dampened the excitement yet, so I guess investors still believe there’s a way forward that will result in more revenue. Or at least they believe the hype cycle isn’t coming to an end so they’re holding on while the prices go up and hope to sell before their holdings lose too much value. It won’t pop until something deflates the expectations of enough investors to start a sell-off. What’s that going to be? Who knows. It might just be a herd mentality thing where a few people begin to sell and more people follow suit.