No other markets, physical or financial, fluctuate daily with as much volatility as the stock market. The stock market is a general representation of the economy and one thing about the economy is that we constantly learn about its past and try to predict its future but never know what is happening presently in real time, because how the system gathers and compiles economic data. Companies present information of business results in the same time-lagging manner quarter after quarter and investors can only speculate on what is going on inside a business and predict its future performance based on past results. Frequent adjustments about prior speculations and predictions on the economy and businesses lead to constant changes in stock prices.
Expectation of Stock Future Values
Investors buy stocks to hold for value growth or price appreciation. Investors have different expectations about stock future values. As stock price has risen, some investors may expect that the value of the stock could be yet higher in the future and so they continue to buy. On the other hand, investors may at any time alter their outlook on the stock based on changing information. For example, a study from Stanford University on predicting the stock market with news information suggests that financial news can change stock prices by ways of human reactions. So when the expectation is a decrease in stock value, a falling stock price likely follows and some investors would expect the price to drop yet deeper, which can lead to continued selling.
Lagging Economic and Business Data
Lagging economic and business data may increase the degree of any potential mismatch between future expectation and actual results in stock prices. Because economic activities and business performances are not reported in real time, investors have to wait to find out what really happened last month, last quarter or last year about everything from home sales and unemployment rate to corporate earnings and business spending. While past results are no guarantees for future outcome, they are nonetheless the only data available for making future analysis, as the system simply cannot generate better data every ten days, five days or every day.
Therefore, the nature of the data's inaccuracy with regard to its use for anticipating future events further fuels the stock market fluctuation first caused by investors' expectation. An academic paper from High Beam Research raised a similar question: do lags of economic data have an influence on future stock prices? The paper argues that unanticipated changes in past economic data tend to lead to stock price adjustments.
Non-traditional Supply-Demand Mechanism
In marketplaces where consumers buy goods and services for consumption, future value expectation does not exist. Instead, assessment of current value dictates buying and selling behaviors. If something is too expensive, the buyer would stop buying and as a result, it drags down price to where it could strike a balance between demand and supply. If something is too cheap, the seller would stop selling and in which case it brings up price to where it could form an equilibrium between demand and supply. Therefore, such markets see less price fluctuation and volatility. But in the stock market, because there are no absolute standards for how much a stock ought to be worth, endless supply and demand of company shares defies the traditional market supply-demand mechanism, causing stock prices to rise and fall without regard to a central, pivotal value.