Ask any person about the stock market and it’s obvious that nearly all will agree stock prices fluctuate frequently. Sometimes share prices increase and decrease by shocking amounts in a single trading day. But what causes the stock market to go up and down in the first place?
Stock prices fluctuate every day due to market forces that affect demand and supply. There are several kinds of forces that cause this volatility, and understanding them can help you weather the ups and downs.
How supply and demand impact the stock market:
In a market economy, any price change can be explained by a temporary difference between what consumers are demanding and what providers are supplying. As a result, economists highlight that markets tend towards equilibrium, where demand meets supply. This is how it works in the stock market; demand is the number of shares people want to buy, while supply is the number of shares people want to sell.
If more people want to purchase a stock than to sell it, there would be higher demand than supply, and the stock price would rise. In contrast, if more people want to sell a stock than to buy it, there would be a higher supply than demand, and the stock price would fall.
Several widely accepted market indicators may cause prices to go up or down.
Investors will buy stocks if they are convinced that stock prices will increase in the future. However, if there is a reason to think that shares will perform badly, there would be more investors willing to sell than to buy. The events that impact investor confidence include:
- Concerns about deflation or inflation
- Wars or other conflicts
- Government monetary and fiscal policy
- Natural disasters or extreme weather fluctuations
- Technological changes
- Corporate or government performance data
What are the largest increase and decrease in history?
The largest single-day point drop in the history of the Dow Jones Industrial Average occurred on March 16, 2020. The stock market lost 2,997.10 points, nearly 12.9 percent of its value. This move was due to the coronavirus pandemic, which created a lot of uncertainty about the future. As a result, the stock market had many more sellers compared to buyers.
The largest single-day point gain in the history of the Dow Jones Industrial Average occurred just a week later on March 24, 2020. The stock market rebounded 2,112.98 points, nearly 11.4 percent of its value.
How can investors weather the ups and downs in the stock market?
The stock market has been on a roller coaster lately, and if you’re concerned about it, here are few things you can do to make sure you’re going to be all right. Investors shouldn’t panic, as emotionally driven decisions are never a good idea. If you’re too anxious about the pullback in stock prices, you can re-align the portfolio by decreasing the percentage of stocks. Investors need to have a plan in place to rebalance the portfolio if the stock prices decline further.
Investors should have at least six months worth of living expenses saved in a bank account as it could increase their financial confidence when stock markets are unsteady. Investors should stop checking their investment balance daily as it might add to their anxiety and would shift the focus away from their long-term goals.