Why do stock prices rise & fall?
If you can estimate when stocks are going to rise or fall, you can make a nice profit on the stock market. A fall or rise in the value of shares can have many causes. In this article we discuss the various reasons that can make a share rise or fall in value.
Stock prices are constantly rising and falling: this is due to the constant game of supply and demand. When more investors want a share, the price rises. At the same time, you see that the price of a share falls when many people sell it. If you want to achieve good results with investments in shares, it is important to make predictions about the future demand for a certain share.
Profit forecast and quarterly results
Expectations of the amount of profit that a company will make influence the stock price. If there is a very positive profit expectation, then this gives a company share a good future perspective. As a result, more investors will want to buy a share. A negative profit forecast, on the other hand, obviously has the opposite effect.
The expectations that are expressed about a company’s figures are interesting because they allow you to predict increases and decreases in the future. However, you only get certainty after the quarterly figures are announced. At that moment, shareholders will know for sure what results have been achieved and will act accordingly.
The strongest movements can be seen when the realized figures deviate strongly from expectations. On the stock exchange you see that expectations are often already incorporated in the price. If the figures are disappointing, the price of a stock can suddenly fall sharply while positive results can lead to a sharp rise.
Social and economic developments
Developments taking place in the world also have an effect on the stock market. If, for example, there is an uncertain political climate in a certain part of the world or a threat of war, the shares of companies in this region will fall. Natural disasters are also a cause of sudden changes in the price of stocks.
Incidentally, negative developments in the world do not always negatively influence the value of stocks. For example, a threat of war in one part of the world may increase the value of shares in another part. The competitive position of companies in the ‘safe areas’ then improves. When the uncertainty on the stock market increases, you see that investments that are regarded as safe increase in value: examples of this are gold and silver.
A good example of a political situation that can have a major impact on stock prices is the trade war between America and China in 2020. As both countries increased tariffs on products, trade between them decreased, which is bad for business results. The extra measures taken against Huawei, for example, have put considerable pressure on the results of the company.
Therefore, if you want to invest in specific regions, it is certainly worth investigating what is going on. That way, you can better predict whether share prices will rise or fall in the future.
Inflation and interest rates
The inflation and interest rates set by the Central Bank also influence the share price. Inflation is the rise in the price level of products in a region. For bonds, inflation is bad news: future payments are worth less. Stocks are slightly less affected by inflation: companies can increase the cost of their products. However, the materials they have to buy also cost more. As a result, a company does not really benefit from inflation: only real growth in profits has a positive effect on the share price.
The interest rate does have a clear effect on the price of shares. A low-interest rate creates a favourable climate for companies, as they can arrange financing at low cost. At the same time, you see that consumers are also buying more products: after all, it is less attractive to save money and taking out consumer credit is cheaper. These developments contribute to the (future) profitability of the company, allowing stock prices to rise further.
Moreover, with lower interest rates you see more money flowing to the stock markets. This happens because it is not possible to achieve a positive return elsewhere. When a lot of money is available, it is also easier for banks to invest. When more shares are bought, you see that share prices rise.
Is the interest rate rising? Then it is important to be vigilant! A rising interest rate can put pressure on the share price, since it can adversely influence business results.
A changed dividend policy can also cause the price of a stock to rise or fall sharply. When a company starts to pay out more dividend, you see that the stock price often rises. On the contrary, a decrease in the dividend can put pressure on the stock price. This is certainly the case with shares that have always been known as stable dividend shares.
A good example of this can be seen in Shell’s share price in 2020. This company is known to pay out a stable dividend. Under the influence of the corona pandemic, they were unable to pay the recurring dividend, which meant that the dividend had to be reduced considerably: as a result, many investors sold their shares, causing the stock price to fall significantly.
In the long term, however, you have to be careful when a company increases the dividend payments. When a company pays a dividend, this money cannot be invested in new projects in the future. On the contrary, profitable projects can contribute to a rising stock price in the future. When a company pays out too much dividend, this can put pressure on profitability and the share price in the future.
It is also important to remember that the stock price drops temporarily after dividends have been paid out. If the company pays out $1 per stock, the share price will fall by $1. This makes sense: after the dividend payment there will be $1 less per share in the company.
Takeover rumours are almost always positive for shareholders. When a company expresses interest, the stock price rises sharply. The other company often pays a premium when the takeover goes ahead. When the takeover is eventually called off, you see that the stock price drops back to its old level.
Stock market trend
When investing in stocks, it is wise to determine the general trend. Sometimes the stock market is clearly in an uptrend or a downtrend. In a downtrend you will see that the shares mainly decrease in value and investor confidence is then low. Extreme cases of this can be seen during a crisis: think, for example, of the credit crisis or the debt crisis. In a downtrend, you can look for good times to buy back shares.
In an uptrend, stock prices mainly move upwards. This is, of course, a good thing when you own many shares. A sharp rise can be a good time to sell some of your shares and take a stock price gain.
A stock split also causes the price of a share to fall. However, a stock split does not reduce the value of your shares: the stock price is deliberately lowered. A company can do this to make shares more accessible to retail investors. If more retail investors buy the shares, the stock price may rise over time.
With a stock split, the value of a share is reduced: for example, your share is then worth $5 instead of $10. For each stock you own, you receive two, so that on balance nothing changes.
Shorters & short squeeze
As an investor, you can bet on a fall in the stock price by shorting. With a short position, you promise to deliver a share in the future at a certain price. If the share price subsequently falls, you can buy the stock cheaper and sell it at the higher price.
A short position carries risks: when the price rises sharply, investors want to buy back the shares quickly. This can happen, for example, when a company publishes unexpectedly good figures. The short sellers then try to buy back the stocks quickly to meet their delivery obligation. If the shorters buy the stocks en masse, the share price may rise further. We also call this a short squeeze.
In rare cases, there may even be a phenomenon called cornering. When a company has a limited number of shares outstanding, a smart fund can apply this strategy. If, for example, a million shares exist and investors open short positions for 1.1 million shares, then all the shares cannot simply be delivered. The fund can then decide to buy all the stocks. In this way, the investors with the short positions are cornered, as they have to bid against each other to be able to deliver the shares. As a result, the share price can suddenly rise sharply.
The exchange rates of currencies can also influence stock prices. As a result of globalization, companies are increasingly selling their products to other regions. When a European company sells products in America, they receive dollars for their products. If a European company sells products in America, they receive dollars for their products. When the value of the euro rises sharply, the competitive position of European companies is weakened because the products are relatively expensive for other countries. Fluctuations in exchange rates therefore affect the results of companies operating internationally.
Your investment results are also directly influenced by exchange rates. When you buy American shares with pounds, you can lose money when the dollar becomes worth much more against the pound. You will then receive fewer pounds back when you eventually sell your investment again.
Many investors want to know whether stocks are going to rise in the coming days, weeks or even months. Unfortunately, there is seldom a clear answer to this: stock markets are unpredictable and a rising price can simply turn into a falling one.
In the longer term, you can make better predictions. Over 30 years time there is a good chance that share prices will rise. In the past, share prices have grown in the long term. This is logical when you consider that productivity increases over the long term.
However, it is difficult to determine whether stock prices will rise tomorrow. That is why it is wise to take a staggered approach: by buying stocks periodically, you avoid entering the market at the wrong time.
Do you want to know the best method for investing in stocks? In our stock buying guide you will learn everything you need to know:
What do you do when stock prices fall?
Don’t panic an important piece of advice. Many inexperienced investors sell their stocks when prices fall, which is a shame. In the long run, you see that stock prices recover.
It is therefore wise, above all, to keep aloof. Bear in mind that the motto no pain, no gain certainly applies to investing: you sometimes have to bleed a little to achieve a higher return in the long term. After all, when you put the money into a savings account, you know for sure that your money will be worth less.
Especially when the prices drop, you can also look for great opportunities & bargains. When stocks have fallen sufficiently, you can often buy them at a favourable rate. You can then achieve a high return in a short period of time.
What do you do with the news?
In the news you often only read headlines that relate to the short term; the stock market is crashing or new records are achieved. If you want to invest well, it is best to avoid these mainstream media as much as possible. The aim of the media is to keep your attention with fierce headlines. Bear in mind that an investor has time as a best friend; therefore you should not focus too much on the short term.
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When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.
Thanks on a factual and precise overview, with 50 sucessful years of investingyour article is so correct if followed, it will insure success. Peter.