Why Does the Stock Market Keep Going Up & Down?

One of the key functions of the stock market is to channel capital to promising companies.

The stock market is sensitive to changes that alter investor expectations of future profitability. Changes in expectations influence stock prices as new industries and products emerge while others decline in relevance.

Economic Conditions

Changing economic conditions influence the level of investment in the economy. Investors often gauge economic performance through certain indicators like the Consumer Price Index to measure inflation. In addition, changes in the shape of the bond yield curve can also help investors develop an outlook on future economic conditions.

Risk

The risk investors perceive in the stock market influences the investment decision. For example, recessionary conditions may cause investors to believe that the stock market is especially risky because of the decline in consumer and business spending. The demand for stocks decreases along with stock prices during recessions. The opposite is true during periods of strong economic growth.

Income and Savings

The capital that flows into the stock market comes partly from individual income and savings. Since income and savings vary in the long-term, the capital flowing into the stock market also varies. These variations change the supply and demand for stocks, which influences stock prices.

References

• "Financial Markets and Institutions;" Jeff Madura; 2009

Resources

• Bloomberg: Stock Markets
• New York Stock Exchange: How a Stock Is Bought and Sold