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Understanding Why Stock Prices Rise and Fall

Written by The Content Team | Published on November 26, 2018

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As you likely know well, it can be hard to figure out just why a stock is moving higher or lower on any particular day. It's even harder when markets appear to be reacting in the exact opposite way you might expect based on what's happening in the world around you.

 

At the heart of all stock-price movements, of course, is supply and demand. If more people want to buy a stock than want to sell it, prices move up. Reverse the situation, with supply outweighing demand, and you'll see prices fall. But what plays into an investor's decision to buy or sell a particular stock, ultimately creating that supply and demand?

Let's look at a few of the many factors that can affect stock prices.

Market Sentiment: Bull vs Bear

Investor confidence can affect both the broader market and individual stocks. For example, in bull markets when stock prices are rising and sentiment is high, investors are more inclined to participate in the market, which can have a positive impact on prices. Alternatively, in bear markets, with stock prices falling and sentiment low, investors might be inclined to sell off stocks in favour of so-called safe havens like cash or bonds. This kind of exodus can cause price weakness.

Company Announcements: What Happens at HQ Does NOT Stay at HQ

What happens inside company headquarters can have an impact on a stock's price. Everything from a CEO shakeup to layoff announcements can cause short- and long-term changes in a company's stock price. Here are some company-specific factors that could have an impact:

  • Earnings reports
  • Plant closures
  • Rumours or news about mergers or acquisitions
  • News about new products or patent applications
  • Large capital investments — think buildings, equipment, hiring
  • Employee layoffs or new hires
  • Changes to dividend payouts
  • Management departures, voluntary or otherwise

Economic Indicators: Data, Data, Data

The economic outlook is widely studied as one of the indicators of future stock-market health. An uncertain outlook can create hesitant investors, while a largely positive outlook can encourage more stock-market activity.

Many experts are quick to point out, however, that the markets are not the economy — which means markets can move in the opposite direction of economic sentiment. Case in point: the COVID-19 pandemic led to some unusual market movements which left some market-watchers perplexed.

Still, an individual company might be sensitive to economic shifts, government policies or political upheaval, depending on its industry, sector and business model. Here are a few pieces of the economic pie that can affect stock performance:

Interest Rates - Central banks around the world are tasked with keeping economies stable and inflation in check. To do this, they create monetary policy that sets interest rates. Some companies can be sensitive to rising interest rates. Higher interest rates can mean higher borrowing costs for companies. While interest rate moves can be challenging for bonds as bond prices tend to have an inverse relationship with interest rates, higher rates can also sometimes make more secure, interest-bearing instruments like bonds more attractive to new investors — which may result in lower demand for stocks. 

Inflation/Deflation - When consumer prices rise, people tend to spend less, which can curb profits for many companies and may ultimately weigh on a stock's price. Deflation can also hurt firms' profits if they're forced to reduce prices for products and services over the long-term.

Political Upheaval - Whether it's an unexpected election result or geopolitical issues, politics and the economy are inextricably linked — which means political issues can affect stock prices around the world. For example, a newly elected leader considered "pro-business" might push stock prices higher in anticipation of potential pro-growth legislation.

Currency Shifts - In Canada, the relative strength of the loonie can have a significant effect on the stock price of Canadian companies. For example, if the loonie rises relative to other currencies, Canadian goods will cost more for foreign buyers. That might curb buying, which could affect a stock's price.

Industry Specifics: Competing in the Same Space

Market and industry trends can affect companies that compete for the same customers and investors. For example, if a damaging medical study about a beverage ingredient hits the media, all companies using that ingredient could be hurt. However, let's say one company was ahead of the pack and had a replacement beverage ready, that might just insulate it from the damage and could result in a stock-price jump. Outliers like this are generally rare, but not impossible.

The Bottom Line

With stock-price movements, a whole host of factors can come into play. Sometimes there's a single reason you can identify — a great (or poor) earnings report — or a combination of factors may be involved. When you're in charge of your own investments, it's important to stay on top of what's happening, but it's also important to keep in mind that no one has a crystal ball for what lies ahead. Staying informed, following your plan and keeping your emotions under control can all help you weather fluctuating stock prices.

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