Stocks go up and down daily, a fact that may surprise many people who are just starting out in investing.
And although we have been investing for a long time, it is a question that we continually ask ourselves. After all, one of the most basic premises in the investment world is “buy low and sell high”. That is why we want to buy shares at a price and sell them for a profit when they have risen. But why has the price moved in one direction?
If you have ever asked yourself this question, this article is for you, since I am going to explain some of the reasons that make the price of shares go up and down.
Why do stocks go up and down?
Stocks rise and fall by the law of supply and demand. If more people want to buy shares of a company than want to sell, then the price will go up. If, on the other hand, there are more people who want to sell shares of a company than the number of people who want to buy, then the price will fall.
If you know how stocks work, you’ll know that the stock market is basically an auction where buyers and sellers meet: people who don’t have shares in a company and want to buy, and other people who have shares and want to sell.
When the two parties agree on the price, the transaction is carried out through an intermediary or stock broker, obtaining the new share price that will be higher or lower than the initial one.
On the other hand, the market is made up of many participants each with their own reasons for making decisions. Buyers and sellers can be individuals, investment funds, corporations, or institutions, each with their own reasons for making a trade. The point is to try to understand why either of them makes the decision to buy or dispose of a stock .
One of the answers to the reasons why the supply or demand for a share increases is related to the perception of a company . That is, how good a corporation is and how well it will continue to perform its tasks in the future. This leads us to have to ask ourselves what news is positive for the company and what is negative.
When a company announces the launch of new products, services or the expansion of its business to other countries, investors react. If the news is perceived as good, buying pressure will increase and if it is taken as bad, the opposite will happen.
A very typical example is Apple and the launch of new devices. Especially it can be seen with the announcements of the initial iPhone or iPod models, since they were innovative products that produced changes in the industry that last to this day.
But many times, it is the rumors that make the shares rise or fall on the stock market. Some examples may be mergers between banks or possible acquisition of one company by another.
The income statements indicate the profits and losses of a company during a given time. Most publicly traded companies are required to report results on a quarterly basis.
They are very important events as they help investors make decisions based on how well or poorly the company is doing. For example, if your sales or profit margins are increasing, all this compared to data from previous quarters and years.
When we carry out fundamental analysis of a company to try to determine the real price of the shares, one of the valuation methods is through the use of ratios based on the income statement. These analyzes are one of the reasons that can lead investors to want to buy shares of a company, thus influencing its price.
On the other hand, we must take into account the estimates that stock market analysts make about companies. When the income statements are made public, the price can go up or down depending on whether they are better or worse than the estimates made by analysts.
Companies are grouped within different industries and can often be affected by trends within the sector to which they belong, causing their stock market price to rise and fall.
If investors expect an industry to have high growth in the future, companies in that industry are more likely to appreciate in value. Conversely, if investors perceive a slowdown or downward trend in an industry, they may start selling the shares of the companies within it.
A clear example is tourism-related companies that were severely hit by the COVID-19 crisis. It was not expected that companies within that sector would have great future growth due to the uncertainty caused by the pandemic. On the contrary, companies within the consumer sector and especially those dedicated to online sales performed well on the stock market.
The price of a company’s shares, but also stock markets as a whole, are affected by a multitude of external events. Wars, natural disasters, civil unrest or terrorist attacks can directly or indirectly influence financial markets . Not only because of the fact itself, but also because they create situations of uncertainty that are not usually accepted with pleasure by any person or entity that invests their capital.
These events can sometimes work out favorably for some sectors. For example, the terrorist attacks of September 11, 2001 on the Twin Towers, caused on the one hand panic and uncertainty in the stock markets but later caused the rise of companies related to military equipment and technology.
Interest rates also play a very important role in the price of shares. They directly affect how much money companies, governments and citizens are willing to borrow, with the consequent effect on economic activity. Interest rates also cause capital to move from some financial assets to others in search of more risk or more security.
These are some of the reasons that make stock prices go up or down. Everything is based on the law of supply and demand, but the specific reasons why the balance is broken are often not clear. Many times they can be a set of them and at other times they are simply difficult to determine