There are several factors that can cause movement in the stock market such as economic data, geopolitical events, and market sentiment. Learn more for stock market in wikipedia.

Basically, stock prices move up and down on the basis of the law of supply and demand. Stock prices are determined by the purchase and sale of stocks. Over a billion shares of stock are traded on a daily basis. 

Suppose that you have 1,000 people in line to buy a single share of stock XYZ for $10, but there is only half the number of sellers,i.e only 500 people would sell the same share of stock for $10. While the first 500 buyers would each try to get the share for $10, the remaining 500 then raise their offer price to $10.50. Now this higher offer price is tempting for some of the XYZ owners who wanted a better price. They now have the option to sell at $10.50 instead of $10. The stock price then becomes $10.50 instead of $10 since that was the price of the latest transaction.

What can cause a significant move in the stock market?

  • Market sentiment
  • Economy
  • Supply and Demand

 

Market sentiment

If the investors are confident about a company's prospects or if they see the potential for positive developments, they would want to buy that stock. On the other hand, if the investors are not confident about the company’s position, they may want to sell the stock which would cause the stock price to tumble. 

The market sentiment toward a stock could be impacted by:

  • quarterly earnings reports beating or falling short of expectations
  • analyst upgrades or downgrades
  • positive or negative business developments

 

The market sentiment around a particular industry can also affect the demand for a stock. If a company makes electric vehicles and investors see the potential in the future of this market, the stock price soars because investors are confident about the market. But investor sentiment can both make or break a market. If investors feel that there isn’t enough potential in the industry then the stock price of each company in the industry will get affected.

Yet another factor is overall confidence among investors in the stock market. It can have a significant impact on the demand and supply of stocks if investors are of the opinion that the stock market is a great investment option. Similarly, if the market has been on a bull run then it may attract more investors. The inverse of this is also unfortunately true. 

Economy

Irrespective of which direction the market moves, for any change to happen, there needs to be a significant change in supply and demand. Long investors create the demand for a stock as they wish to own the shares. This demand is met with supply created by sellers who are closing out positions or shorts.

An increase in interest rates can create pressure on real estate investment trusts (REITs) and cause a slump in the housing market. Increased interest rates invariably mean an increase in borrowing costs which slows down purchasing activity. As a result stock prices dive. Changes in tax regulations have so far shown a positive impact on the stock movements, as investors and corporations find themselves with more funds at hand to spend on stocks.

It is no surprise that tax increases imply that investors have less money to put into the stock market, which affects the prices as it broadly indicates that the profits of firms have come down significantly. 

Supply and demand

To put it in the most basic terms, supply refers to the number of shares people are willing to sell, and demand indicates the number of shares people wish to buy. When there is a remarkable  difference between these two groups, there will be a movement in the market. 

Let’s understand this with an example. Now think that an individual company is trading up 15% on positive earnings. The share prices are higher essentially because there are now more buyers for the stock. 

Until the share price hits an equilibrium, the share price will keep rising as a response to the difference between the supply and demand of the stock. Do bear in mind that in this scenario, there are more buyers than sellers. This would prompt the buyers to bid the price of the shares higher enough so that the seller is willing to part with them.

A similar thing happens when the overall market moves. The number of buyers and sellers of companies in the stock market is more than sellers/buyers who have a negative sentiment about the market and are causing the price of companies to go down along with the overall market. At the end of the day, the stock market is essentially a collection of individual companies.

Difference Between a Correction and a Crash

Market crashes refer to the significant declines in the market that happen rather quickly. A market correction would generally happen over a longer period than a market crash. Market corrections are identified by stock index declines of 10%, but the actual decline is gradual and takes place over an average of 163 days. This is how it has been measured since 1990.  Similar to market crashes, market corrections can be both temporary or have much long-lasting implications that can cause the markets to go on a bear run or worse.

Bull Market vs. Bear Market

A bull market refers to a market that is growing and where the economic conditions are typically favorable. A bear market is one that exists in a receding economy where the overall prices of stocks are falling. Since financial markets depend a lot on investors' attitudes, these terms are also indicators of investor sentiment and play a major role in determining economic trends. Learn more in YouTube.

 

A consistent increase in price is a hallmark of a bull market. In the case of equity markets, a bull market implies a rise in the share prices of companies. In these times, investors are confident that the market will continue to grow over the long term. Generally, the country's economy is strong and employment levels are high in these cases. 

 

On the contrary, a bear market is declining steadily.  When the market has fallen by at least 20% or more from recent highs, it is known as a bear market. In a bear market, share prices drop constantly, the economy is in a bad phase and unemployment rates are high. 

Latest comments

No comments