Why Do Stock Market Prices Fluctuate?

The stock market can present an easy and quick opportunity to make your wealth multiply. The main goal of trading on the stock market is to buy stocks and sell them at a profit. This is what results in earnings on the stock market.

One key factor that may hold one back from beginning to trade is the constant fluctuations of the market. You may be apprehensive of trying your hand at trading, owing to the volatility of the stock market. To understand the fundamentals of trading on the stock market, we give you a quick snapshot on how stock prices are led to fall or rise. Once understood, you can begin keeping an eye out for the factors responsible for fluctuation and will, therefore, be able to trade with confidence.

Stock market prices are affected by demand-supply economics. In simple words, when demand for a stock exceeds supply, there will be a rise in the price of a stock. The more drastic the demand-supply gap, the higher the price. For example, when many traders are buying stock X, stock X's price per share will increase. The same is true vice-versa. When many traders are selling stock X, stock X's share price will decrease. When experts refer to market forces or market risks they are referring to this falling and rising demand and supply. Of course, this is just economics 101. It is key to dig deeper and observe the various influences that make people buy or sell shares of a given stock.

Company Earnings

People invest long-term in a company based on its worth and how much it is likely to earn in the long-term. A company that is making good profits attracts more investors and this causes its share price to rise. Companies listed on the stock exchange (and whose shares are consequently on traded on the stock market) have to declare their earnings every quarter and annually in what is called an Earnings Report or Quarterly Report. A company that reports good growth or good earnings per share will automatically experience more demand. What must you look for when checking a quarterly earnings report? Look for whether the company's earnings have met or exceeded projections. If the company has done so, its share price will usually increase. However, if the company's earnings have failed to meet projections or if the company has earned less than what it was projected to earn, it's share price will most likely fall.

Good news (or bad news)

If the company reports some good news such as an interest-hike or if it acquires another company or breaks into a new market, it is most often seen to be in good financial health. This could result in a stock price hike. When you hear traders talk about "at the very start of the day markets are still reacting to news and may be very volatile" this news is what is being referenced.
Similarly, a company that has to sell part of its stake, let go of employees or close down branches will be seen to be experiencing financial struggle or a downturn in its earnings. People will tend to sell such stocks for fear that the price of its shares will be driven down drastically or worse, that the company might close down, rendering the shares worthless.
Changes in government policy and important financial events such as the annual budget might also affect the prices of stocks in industries affected by these announcements/events. But these are usually knee-jerk reactions.

Overvaluation and Undervaluation

It is this very paranoia (that shares might be rendered worthless when the company reports bad news) that results in people dumping stock. This results in the share price being undervalued. Some expert traders watch for moments of undervaluation and will try to buy in at this time. They do this because they have made a calculated guess that the company will perform better in the near future. This, they predict, will lead to an increase in demand. They are hedging on the resulting share price rise delivering profits.
Similarly, an assumption that a company will perform well in the future results in a rise in its share prices. You might have heard about the dot com bubble that took place in the US during the 90s. As the name suggests, the share prices of dot com companies rose due to projected earnings. However, the companies did not deliver on these valuations or in other words, had their "bubble" burst eventually. Dot-com companies sprouted out of nowhere, got listed on the stock exchange, overspent shareholders’ money, did not deliver on projections and several eventually closed down, resulting in losses to those who had bought their shares.

Conclusion

Now that you have understood the factors that push stock prices to rise or fall, you’re all set to go ahead and get your trading and demat account in order to begin navigating the stock market. On trading platforms such as IIFL, you can open an online trading account within minutes today. When you open a trading account with IIFL, you get access to world-class technological platforms that help you track the ups and downs of the share market and make an informed decision.

Open Demat Account at IIFL