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Changes in Stock Prices Can Be Caused by Numerous Things

Dec 07, 2018

Modern stock markets can provide a wealth of long-term investment opportunity as well as ample trading opportunities. There are literally thousands of potential stocks to choose from and new companies are listed all the time. Traders and investors do not need to be limited to only domestic stocks either, as modern technology has made it possible to trade hundreds of markets from anywhere in the world with an internet connection.

The particular stocks chosen by traders and investors may be determined by their objectives. A long-term investor, for example, may look to purchase established, dividend-paying stocks in order to try to generate income. An active trader, on the other hand, may look to trade stocks that have large daily trading volumes or that exhibit a great deal of volatility. Most long-term investors look to profit from a rising stock price while active traders or investors may potentially profit from both rising and falling stock prices.

What Causes Stock Prices to Rise?

ways on the move and their values can be affected by a large number of factors. A better-than-expected earnings report by a company may propel its shares higher. For example, if a company like Facebook is expected to report earnings of $1.82 per-share and the actual report shows earnings of $2.05 per-share, the stock could rally as the company is making more money than expected. Expectations are the key for stock prices. Even if a company is losing money, losing less money than expected could propel the stock upwards.

Another example of a bullish catalyst for stocks could be a product roll-out. When a company like Apple announces that it is coming out with the latest and greatest cellular phone or new software program, buyers may bid the stock price higher as they anticipate higher earnings.

Numerous other factors can also cause a stock price to rise. Some other catalysts may be a strong balance sheet, a buyout offer or general expansion.

What Causes Stock Prices to Fall?

Stock prices can also be driven lower by many of the factors. Using the examples above, if earnings for Facebook come in below expectations and disappoint the market, the stock price may be punished as owners sell. If a company like Apple or IBM rolls out a new product line and that new product has technical issues or a bug, investors may look to sell the stock as a fix for such issues may be expensive and the issue could fuel a decline in earnings.

Stock prices may also fall due to many other catalysts as well. If the company needs to issue more stock in order to pay for expansion, the current shares will be diluted which can lead to selling and thus declines in value. If a company has a great deal of debt, rising interest rates may cause investors to sell as the cost of debt-servicing becomes greater.

When is the Right Time to Trade Stocks?

For active traders there may be several scenarios that might be considered the right time to trade. Earnings announcements oftentimes provide a great deal of market volatility and price expansion. As results hit the market, investors will look to buy or sell and price action can see some large directional moves that a trader can potentially capitalize on.

Another good time to trade stocks may be if the stock is in a clear uptrend. Trends can last a very long time in stocks, and if a trader can ride a trend higher for a large move the payoff can be tremendous. Many traders will look to buy stocks on any pullbacks from the primary trend and will ideally buy at a previous support level.

Solid stocks that have been beaten down extensively may also present a good trading opportunity. If the Microsoft or Facebook stock price for example, fell from $108 down to $80 in a few short weeks or months, the stock may be considered oversold and could be a great bargain at $80.

The global equity markets are filled with opportunities and modern traders and investors have the technology to participate in markets all over the world. Understanding market dynamics and what makes a stock go higher or lower can help the trader or investor develop or focus on strategies that may suit their risk tolerance, trading capital and objectives.