Understanding why the Stock Market Rises and Falls

There are a wide range of reasons why the stock market rises and falls. Some of these reasons are logical (lowered corporate earnings), some are seemingly more random. There are times when it seems that any bad news will throw the market in to wild swings and drops.

The stock market has often been accused of overreacting to just about everything, but in reality, there is some method to the madness. Of course, sometimes it just all seems like a big pre-determined conspiracy. But don’t worry, it probably isn’t.

Major economic and political events can have tremendous affects the market. In addition, it’s important to ask; how strong are the credit markets? Are banks giving loans easily, or is money tight? If interest rates are too high, money become expensive to borrow and the stock market drops. High interest rates make it more economically sensible to put your money in a safer, interest bearing account as well.

All of these things can cause investors to stop buying stocks, forcing the stock market down. Some other factors which can influence the stock market include inflation, unemployment, interest rates, corporate earnings, and political uncertainty (notice how the markets are always up and down before a major election? Markets HATE uncertainty). Oil and energy prices, along with corporate layoffs, or any number of unexpected events, can potentially lead to a slide in the stock market. Stock markets love stable political and economic conditions, and bounce all over the place when things become uncertain.

Many times, the negative dips in the stock market are only temporary slides – the market may recover in as little as a days time (or perhaps a week). If too many people try sell their stocks at the same time, prices will drop. When this happens, speculators and other “opportunity oriented” investors can jump in and bring up prices again by snapping up the low priced stock. It’s the old “buy low, sell high” theory in action. Low prices make the stocks look like they are “on sale”, and consequently more attractive to some buyers. Hence the rises and falls in the market. The nice thing about this process is that these “opportunity oriented” investors will actually bring the stock market up and save your 401k retirement fund; or so you can hope.

To fully understand why the stock market rises and falls, it is important to understand the law of supply and demand. If an item or service is in short supply, people pay more for it. On the other hand, if there is an abundance of the item, the price falls. If too many people try to sell their stocks at the same time, there will be a glut of stock available, and the prices will drop. Wall Street reacts to every news release about a private company, their product line, company management, etc. Remember, the stock market is made up of individual companies.

Wall Street also reacts strongly to both national and global news. Unfortunately, major stock markets around the world may rise and fall at the same time. These days, investors have spread their money around to international markets. Globalization has interlinked the economies of just about every nation in the world. What effects Thailand, China, Russia, Germany, England, and others, effects America as well.
At this time, China is a leader in effecting the worldwide demand for stocks. It was a major player in the stock market plunge in the fall of 2008. However, China made some gains after that, and helped stabilize the market in the subsequent months. It’s in the the best interest of every nation to have a stable stock market.
This article should give you a slightly better understanding of why the stock rises and falls. Stock markets rise when the economy is improved. Political, economic, global stability causes investors to be more confident in their investing. Lower interest rates and good levels of employment are also a key to a stock market that does not constantly rise and fall. The stock market is always a bit of a roller-coaster, but with a little research and experience, the mysterious reasons for the rise and fall are understandable. As I said at the start, it’s probably not all a big conspiracy. Probably.