If you’ve spent any time watching the Canadian and U.S. stock markets, you know that stock prices are always going up and down. Prices can be up one minute, and then down the next. A basic understanding of why stock prices are constantly fluctuating will make you a more confident investor.
The total value of the world’s stock markets was at a record level of $95 trillion as of November 2020. Does that mean that stock prices are always rising? Of course not. While the total value of your stocks might increase at the end of every year, the stock prices change every day.
A good question to ask is why do stock prices go up and down? Here are some of the reasons for the daily price movements and how you can identify them.
Supply and demand
The forces of supply and demand would be the Number 1 reason that stock prices keep changing. If more people want to buy a stock than sell, the price goes up. Conversely, if more people wanted to sell a stock than buy, the price would fall. Understanding supply and demand might give you a clue on when best to buy and sell stocks.
Companies’ earnings reports are closely watched by investors, analysts and traders. If a company’s financial results beat analyst estimates, the price of the stock is likely to rise based on the good news. The reverse is the case and stock prices are likely to drop if earnings are below expectations. However, the market may sometimes behave differently than expected.
Earnings per share is a company's profits divided by the number of shares outstanding. As the owner of the stock, you may be eligible for dividends, and earnings per share represent your return on investment.
Poor performance and internal issues
Poor profitability and negative internal issues could also drive a company’s stock price down. Factors such as significant employee layoffs, executive turnover, lawsuits against the company, accounting errors, and other scandals could drive stock price down.
All these affect performances, sentiments, overall demand, and ultimately the price of the company stock.
Inflation and interest rates
Inflation leads to higher consumer prices, which will often slow a company’s sales. In a high inflation environment, the Bank of Canada may decide to impose higher interest rates to slow down the impact of rising prices. The changes could lead investors to more fixed-income investment options, thereby lowering stock prices.
Interest rates control is one of the main instruments used by The Bank of Canada to stimulate or stabilize shifts in the economy. If you’ve ever leased a car or purchased a home, there’s no doubt you appreciate the importance of interest rates! Companies are no different from consumers in this regard. Such monetary policies make stock prices go up or down.
You wouldn’t think that emotions could influence share prices that much, but they do all the time. Think about it from your perspective. If you’re not feeling positive about the economy, you’re likely to avoid the stock market. The result: stock prices go down.
Events that affect investor confidence include:
- Wars or other conflicts
- Fears over inflation
- Government fiscal and monetary policy
- Technological changes
- Natural disasters or extreme weather fluctuations
- Corporate or government performance data
If the economy is doing well and you feel secure in your job and the socio-political environment, you would be more inclined to buy. If there are enough investors who feel as optimistic as you do, stocks will surge. Confidence and emotions make stock prices go up or down
If you prefer to invest in sectors that align with your principles of social and environmental responsibility, you can find out more about the sustainability values and practices of publicly quoted companies at Scotia iTRADE Sustainable Investing.
The value of the Canadian dollar
If you trade in stocks, you need to keep an eye on the Canadian dollar and exchange rates. If our dollar’s value increases, customers outside of our borders will expect to spend more on Canadian goods and services. That may decrease a company’s sales, and thus negatively impact its stock price. Of course, the opposite is true. When the Canadian dollar falls, our goods become cheaper. Sales may increase, driving stock prices up.
There’s no doubt that the news headlines can influence share prices. Economic reports, product inventions, scandals, strike actions, inflation reports, and other daily news digests also affect the stock market.
Experienced investors, however, choose not to overreact to any single news item. Rather, they’ll look at the economy and their portfolio goals in totality, adjusting their investment strategy accordingly. So, they are looking at both the daily price movements as well as the bigger picture.
The bottom line
The bottom line is that stock prices will always rise and fall. Savvy investors will want to pay closer attention to the short-term and long-term market movements. Is it a result of a one-time catalyst? Or a combination of factors? Is it an overall downward market trend? Or simple and normal day-to-day price fluctuations? The best investment decisions should always be based on knowledge and experience. You can get some great resources at the Scotia iTRADE Learning Centre.
It is impossible to predict market volatility. However, knowing the forces that trigger the rise and fall of stock prices will help you be better prepared whenever those moments inevitably come.
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