Company's stock will equal today's price plus complete random number if the price of a stock constitutes a random walk. Random walk indicates the uncertainty of stock prices.
If the stock constitutes a magnitude of random walk, then the future valuation of stock becomes unpredictable.
A random number is added to the present price of stock while measuring the next year's price. A random number can be positive or negative in this regard.
A fall in the stock price of a single company affects on the stock prices of other companies. Investors have general tendency to judge market in a random way. They assume that the stock prices are going to decline in the future.
Hence, investors try to sell their shares. Increase in the selling of shares leads to reduce the market price of stocks.
Thus, the herd behavior of investors causes to transform a fall in the stock price of a single company in to the precipitate collapse in the piece of many stocks.
A price fluctuation tends to increase when stocks are purchased despite higher price and they are sold when price is lower.
Normally people would sell their stocks when the price is higher in the market. But, on the contrary, speculators behave irrationally; they sell their stocks when the price is relatively lower. This behavior of speculators tends to increase price fluctuations in the market.
The following are two diagrams which indicate buying and selling of stocks.
The above diagram (a) indicates that a speculator demands for stocks is higher at higher price. The quantity supplied changes according changes in quantity demanded.
The figure (b) shows that the stock is sold at lower price. The quantity demanded changes according to changes in the quantity supplied.
If a speculator sells his stocks when the price is lower in the market, then he would have to bear the loss. Thus, buying when price is high and selling when price is lower is not in a best interest of a speculator.