Understanding factors that cause stock prices to fluctuate
Published on: February 09, 2021 12:00 (EAT)
Stock prices increase and decrease in value frequently, fluctuating sometimes by shocking amounts and in short periods of time. New traders or investors will want to know why this is the case. Here is a basic overview of some of the factors that cause this fluctuation in the stock market to help you understand better. The Stock Market Is an Auction In order to understand this better, it is important to see that the stock market is in essence an auction. Notice that one party is looking to sell its ownership in a particular company, and another party is looking to buy ownership. The trade is matched when both the parties will agree upon a price, and that also becomes the new market quotation for the shares or the stocks of that company. These buyers and sellers may be individuals, institutions, governments, corporations, or asset management companies that are managing funds for private clients, index funds, mutual funds, or pension plans. In most cases, the parties will not have any idea about who is on the other side of the trade. Trading volume in simpler terms is the number of trades, and it can show how much a particular stock is in demand, or how much interest from other investors is there in it. It can also give the investors and the traders an idea of how easy it will be to get into or out of a trade in a stock. Supply and Demand The supply and demand can have a huge impact on the price of a stock. For instance, think about what will happen when there are 10 investors looking to buy Apple stock but there is only one seller in all of the stock market. As the stock market is similar to an auction, when there are less sellers and more buyers, the price of the stock will have to adapt or no trades can be made. This should drive the price of the stock upwards, the market quotation at which investors can sell their shares will increase. This will also make many investors want to sell their stocks or shares, even those who had previously not been interested in selling. On the other hand, when there are more sellers than buyers the price of the stock will go down. As there is less demand, the seller who is willing to accept the lowest bid will set the price of the stock. Another problem could be when large amounts of stock are dumped at once on the market at once. For example, when firms like Lehman Brothers were forced to dump everything they could to try and raise money during the financial crisis of 2007-2009 as they struggled with bankruptcy. The market was flooded with securities that were worth much more, especially for the long-term buyers, than the price at which Lehman Brothers was ready to sell. What Influences Buyers and Sellers Normally, the value of shares of stock doesn’t move much within a day. The price can go up or down by a percentage point or two. There may still be occasional larger swings in the price of a stock. But there are events that can take place and cause a huge rise or fall in the value of the shares. External Events Price fluctuation could be caused because of an earnings report that shows bad or good financial news. It could also be a major financial news event, for example, an interest rate hike. Surprisingly, it could even be a hurricane or another natural disaster that can have far-reaching consequences. Any of these events could cause a reaction in the market, causing the traders and the investors to rush and buy or sell shares. These reactions could be a result of a calculated decision, or could be based on emotions, but either way, they can have an impact on the value of the shares. Investor Analysis There are many different styles of investing in the stock market. This can have an impact on stock sales. For example, a particular company issues a poor earnings report and causes panic selling amongst the holders of that company’s stock. By selling their shares, they will also be driving the price down as the supply will exceed demand. On the other hand, there may be investors who see the bad news as temporary and see an opportunity to get the shares at a discount, and then sell when the value of the stock goes back up. Normally, the traders and the investors will choose to buy or sell shares by taking into account the company’s balance sheet, and their overall impression. However, there is nothing in the stock market, or outside it, that can guarantee if a stock will go up or down. In the world of stock trading, big risk and big reward are correlated.