Stock markets go up and stock markets go down. It’s enough to make you feel dizzy and scared to invest. So what causes these fluctuations?
It starts with supply and demand.
The price of a stock will rise as more people want to buy it, and fall as more people want to sell it.
So, what influences demand?
Earnings and profit play a major role.
For example, imagine your local Thai takeaway is listed on the stock market.
It posted record sales in the most recent quarter so it will probably attract more investors, pushing up the stock price.
But earnings don’t tell the whole story.
There’s also local competition, the rising cost of ingredients, the possible unionisation of delivery drivers and more.
Other factors which influence demand include:
- Wars or other conflicts
- Concerns over inflation or deflation
- Monetary policy
- Corporate or government performance data
- Technological changes
- Natural disasters or extreme weather
In recent years, we’ve witnessed the boom and bust of two large stock market bubbles that formed around the internet sector in the early 2000s and the housing market’s global financial crisis in 2007-08.
In both of these cases, stocks became overvalued, and investors poured money into unprofitable or unsustainable markets.
When the truth came out, investors rushed to sell, sending stock prices tumbling.
The inherent risk of the stock market is that any number of forces can push prices up or down.