What Makes Stock Prices Rise and Fall?

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Stock prices rise and fall for a variety of reasons.
Stock prices rise and fall for a variety of reasons. (Image: stock market analysis screenshot image by .shock from Fotolia.com)

The demand for a stock is based on a variety of factors. Some of these are economic factors, such as interest rates, and others are unique to the individual investor, such as an investor’s risk tolerance. Investors should note that stock prices can be affected by some of these factors at one time or possibly all of these factors at one time. It can be difficult to isolate the effects of one particular factor.

Interest Rates

When the Federal Reserve decides to raise interest rates, consumers delay their purchases and start to save money due to the increased cost to purchase items. As a result, a business makes less profit. When investors notice decreased business earnings, investors sell stocks and stock prices fall. Similarly, when the Federal Reserve decides to lower interest rates, consumers often decide to spend because of the decreased cost to purchase items. When consumers spend, businesses see an increase in profit. As investors notice the increase in business earnings, they start to invest in the stock market, which increases the demand for stock and stock prices rise.

Investments

When a business determines that the return on an investment is not enough to compensate the business for its costs to invest, it will not pursue the investment. As investors notice this decrease in investment activity, investors sell stock because the stock is worth more now than what it will be in the future, and investors want to avoid losing money. As more investors sell stock and demand for stock decreases, the price of stock decreases.

Earnings

When the economy shows signs of declining, a business’s earnings decrease. With decreased earnings, businesses may choose not to pay the amount of dividends that were paid in previous years. For investors, this means that they earn less income and it serves to discourage investors from investing in stocks. In addition, investors currently invested in stocks may choose to sell as they discover other investment vehicles that will provide more income. As the demand for stocks decrease, stock prices fall.

Labor Market

When a company cuts its work force, this initially has a positive effect on stock prices. Fewer employees means the company has increased profits as it pays less in salaries and benefits. When investors notice increased earnings for a particular company, they may choose to purchase the stock, which increases demand and stock prices rise. However, an investor should note the reason that a company has decreased its work force. If the company is having trouble finding new business, then the reduction in the company’s work force is a warning sign to investors. If investors notice this, they will pull their money out of the company and the stock price will fall.

Risk Tolerance

Investors can be cautious with their money. When market scandals surface or investors note trouble in other parts of the economy, investors loose faith in the stock market. This decrease in investor confidence pushes investors to sell stocks. As the demand for stock decreases, stock prices fall.

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References

  • “Canadian Securities Course: Volume One”; CSI Global Education Inc.; 2008
  • Stock Price Factors
  • Marie Zukowski; Professor; Seneca College, Toronto, Ontario
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