The stock market is a complex, interrelated system composed of large and small investors making uncoordinated decisions about a huge variety of investments. The market could be construed as an ecosystem organized by an invisible hand. Each market participant acts and plays freely based on their individual ideas and following their own personal interests. "The market" is shorthand for the collective values of individuals and companies.
There are basic economic principles that can help explain up and down market movements, and with experience and data, there are more specific indicators that market experts have identified as being significant.
Key Takeaways
"The market" is not a monolithic entity but a complex system of individual, professional, and institutional investors, each making decisions based on their own views and interests.
The law of supply and demand holds true as in any market.
Some factors, such as the rate of inflation, have the power to move the market as a whole higher or lower.
Other factors, such as corporate earnings, may move a single company or an industry sector.
In a market economy, any price movement can be explained by a temporary difference between what providers are supplying and what consumers are demanding.
This is why economists say that markets tend towards equilibrium, in which supply equals demand. This is how it works with stocks, too. Supply is the number of shares people want to sell, and demand is the number of shares people want to purchase.
If there isa greater number of buyers than sellers (more demand), the buyers bid up the prices of the stocks to entice sellers to sell more. If there are more sellers than buyers, prices go down until they reach a level that entices buyers.
Individually, security instruments like stocks and bonds are dependent on the performance of the issuing entity (business or government) and the likelihood that the entity will be valued more highly in the future (stocks) or be able to repay its debts (bonds).
Widely Accepted Market Indicators
This begs another question: What creates more buyers or more sellers?
Confidence in the stability of future investments plays a significant role in whether markets go up or down. Investors are more likely to purchase stocks if they are convinced their shares will increase in value in the future. If, however, there is a reason to believe that shares will perform poorly, there will be more investors looking to sell than to buy.
Events that affect investor confidence include:
The publication of economic indicators such as the Consumer Confidence Index
Changes in the level of trust placed in an industry such as the financial sector
Changes in the level of trust placed on the legal system
The largest single-day decrease in the history of the Nasdaq Composite Index took place on March 16, 2020. The market "lost" (traded down) 970.28 points, over 12% of its value. This move is attributed to the COVID-19 pandemic, which created a lot of uncertainty about the future. Therefore, the market had many more sellers than buyers.
Interest rates also may play a role in the valuation of any stock or bond. There are several reasons for this, and there is some debate about which is most important. First, interest rates affect how much investors, banks, businesses, and governments are willing to borrow, therefore affecting how much money is spent in the economy. Secondly, rising interest rates make certain "safer" investments (notably U.S. Treasuries) a more attractive alternative to stocks.
Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future performance. Investing involves risk, including the possible loss of principal.
If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.
If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Understanding supply and demand is easy.
It is hard to know whether the price of a stock will go up or down. Many different forces can affect stock prices, including company news and performance, industry performance, investor sentiment, and economic factors.
The more people want something, the more demand there is. That means that they can be sold for more money. However, if there are lots of people selling (or supplying) the same goods, and there are not many people who want to buy those goods, then the demand will drop and the prices will be lower.
In summary, the key fundamental factors are as follows: The level of the earnings base (represented by measures such as EPS, cash flow per share, dividends per share) The expected growth in the earnings base. The discount rate, which is itself a function of inflation.
The law of supply and demand holds true as in any market. Some factors, such as the rate of inflation, have the power to move the market as a whole higher or lower. Other factors, such as corporate earnings, may move a single company or an industry sector.
Sharp increases in asset prices and a speedy expansion of credit often coincide with rapid accumulation of debt. As corporations and households get overextended and face difficulties in meeting their debt obligations, they reduce investment and consumption, which in turn leads to a decrease in economic activity.
Economic growth often is driven by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending. Deregulation relaxes the rules imposed on businesses and has been credited with creating growth but can lead to excessive risk-taking.
The law of supply and demand centers on prices that change when either the supply of goods and services or the demand for them changes. Normally, when supply increases and demand doesn't, prices go down. If supply remains unchanged while demand increases, prices rise.
The stock market can go up or down based on a number of different factors, including consumer confidence, worries about inflation, and supply and demand. As an investor, it's important to understand market fluctuation and how it works, and to know how much fluctuation is normal. Why do stocks fluctuate?
If the demand for a particular stock increases for any reason, the stock price starts rising. As every sale attracts more bidders for that stock, the price moves higher. Similarly, if there is a drop in demand for a particular share, fewer bidders are attracted pulling the stock price low.
Other aspects such as wars, large corporate hacks, changes in federal laws and regulations, and natural disasters within economically productive areas may also influence a significant decline in the stock market value of a wide range of stocks.
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