Great question! I know of the standard simplistic answer, but still curious about how it works in detail. In theory a share represents your claim on the future profits of the firm and grants you some control over its decisions. So when the prospects of the firm look bleaker, more shareholders will sell, pushing the price down until there is a consensus that the current price fairly represents the value of a share.
What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?
What bothers me is that most traders don't care about control or profits - they just want the number to go up (or down). How does the price get grounded in reality in this case? The answer is presumably: in trades between speculators and those who do care about profits and control. But where is the guarantee that those trades happen? What if speculators mostly trade among themselves?