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Why do stock prices fluctuate?

A stock market is a place where shares of public listed companies are traded for profitable returns. However, stock market fluctuations often cause uncertainty and fear in a lot of investors/traders. The frequent ups and downs and the non-predictable nature of the stock market often deter people from considering it as a potential option for making or growing their money.

What are the reasons behind stock market fluctuations?

The stock market is volatile and is affected by various factors. It is also very reactive to the public sentiment and social, geographical, political, and environmental factors. For easier understanding, we would further segregate this into two categories, namely market sentiments and technical factors.

Market sentiments

Market sentiments comprise the psychology of various stakeholders, both individually and collectively, which influence the prices of stocks. It is often the most volatile factor as it is influenced by biases, subjective factors, and various external situations.

For instance, if there is a sharp rise in the number of shareholders buying a particular stock due to future projections or speculations, there are high chances that the stock prices would increase. It can happen due to the forces of demand and supply. The more demand, the higher the price, and vice versa.

Similarly, stock prices are also influenced by some single piece of news that can keep the stock prices high or low artificially for a short period.

Moreover, any media news, rumors, or media report/projection about an event or future happenings can also affect stock prices, causing them to fall or rise sharply. For example, even speculation about a merger, takeover, or acquisition can bring fluctuations in the share price.

Any negative publicity is also enough to cause sudden movement in the share price. For example, any news or rumors about any scam or scandal about a company’s reputation, profits, employees, or senior management can make the share drop down sharply.

Technical factors

Technical factors are those factors that have a direct bearing on the share prices. These factors are a combination of external factors that affect the demand and supply of stock, such as economic or accounting factors. Some examples of technical factors that can affect stock prices are as follows:

  • Any news or announcement regarding the present profits and earnings or predicted future earnings of the company
  • Any announcement of a major corporate restructuring or a launch of a new product
  • Overvaluation and undervaluation of stocks (In undervaluation, the price of a stock is presumed to be below the investment’s true intrinsic value. A stock is deemed to be overvalued when its market price is higher than its perceived value)

Economic factors such as inflation, share trends, substitutes, demographics, liquidity, etc., also affect share prices and lead to stock price fluctuations.

It is very important to understand the nuances of the stock market before finalizing stocks to buy today or tomorrow. Various factors can affect stock prices and, in turn, your earnings. You should adopt a diversified approach for trading in stocks. Lastly, it is crucial to remember that every stock purchase is unique, and it can be difficult to predict the direction of the stock. However, understanding these factors can help you make some informed decisions.

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