5 Reason Stocks Drop and Rise So Much

The reason for large stock fluctuations usually falls within certain categories.

The reason for large stock fluctuations usually falls within certain categories.

Since the 17th century when the first shares were traded on the Amsterdam Stock Exchange, investors have tried to determine just what makes the price of stocks rise and fall. There are specific occurrences that cause large stock price fluctuations, but it is impossible to predict to what extent the market will react to those occurrences.

Unexpected News

Nothing unsettles investors more than news that is completely unexpected. A tornado destroying a company's assets can cause investors to panic and dump their stock. Rumors of a prominent investor, such as Warren Buffet, buying a company's stock can cause more investors to buy the stock, pushing the price up. Surprise announcements often cause over-reactions, resulting in significant price swings in a short period of time. It is not until the dust settles that you know the true impact of a surprise announcement on the value of a stock.

Speculation

Little drives stock values up or down faster than exuberant speculation, followed by deflated dreams and panic selling. Speculation fueled the tech bubble during the 1990s, pushing the price of tech stocks to very high levels despite the fact that many of the companies had never made a profit. In July 2007, CBS News reported that shares in a Canadian mining company, went from $1 in 1993 to more than $200 in 1996 based on nothing more than speculation that the company was literally sitting on mountains of gold. When it was later determined that there was no gold, the company declared bankruptcy.

Company Fundamentals

Positive or negative, company events such as how much it earned, or what product it has coming out can cause big price swings. When a company is experiencing great success with product launches, the share price typically reflects that. Stock can increase dramatically due to success of current products, as well as anticipation of new ones.

Supply and Demand

You buy and sell stock for personal reasons, as do other people. When large groups of people sell at or near the same time, a greater supply of shares is given to the market. If there is no demand to meet the increased supply, the price drops. Large groups of buyers increase the demand for a stock and, if not offset by supply, will drive the price up.

Government Intervention

When the government acts, it can have long- and short-term effects, causing stock prices to rise or fall. The government-appointed Federal Reserve helps control short-term interest rates and the money supply of the United States. Altering either of these impacts the stock market and investors. Raising interest rates increases borrowing costs and leaves consumers with less money to spend, resulting in lower stock prices. An increase in the money supply makes consumers feel wealthier and more apt to invest, pushing stock prices up. Investor and consumer reaction to these moves is not always the same.

 

About the Author

Cory Mitchell has been a writer since 2007. His articles have been published by "Stock and Commodities" magazine and Forbes Digital. He is a Chartered Market Technician and a member of the Market Technicians Association and the Canadian Society of Technical Analysts. Mitchell holds a Bachelor of Management in finance from the University of Lethbridge.

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