We all know that stock prices keep going up and down all the time and we all have spend endless hours on chart and indicators trying to predict the movement of these prices. However sometimes you often wonder, what makes them go crazy, is there some reasoning behind this madness?
Its very complicated to precisely say what caused todays price change in the stock, however we can understand broad set of reasons which cause these changes. The current change which may have been a reason for your joy or sorrow could be one of them or a combination of all or some of them.
Supply & Demand
This is possibly the simplest explanation for the market movement. Supply and Demand form the foundation of a fair market.
The seller always wants to sell at highest price, while buyer always wants to buy at lowest price, they negotiate and eventually settle at a price which may be equal to or between the highest and lowest price.
Now if there are only 2 people in the market, then these 2 people would have to agree on a price for the transaction. However if there are more sellers than the buyers, then some sellers would not be able to sell their stocks. This creates a competition between sellers and everyone wants to sell their stock, and the only way they can do it is by lowering their prices. This would drive the price of the share down.
If the buyers are more than sellers, then some buyers would end up without stocks, so there is a competition between buyers to buy and the only way they can do it by buying at higher price than the next buyer. This would drive the price upwards.
So what causes the number of buyers and sellers to change?
Company Performance
A share is a partial ownership of the company, so if the company makes money, you get a little share of that as a shareholder. The company may choose to pay you back that little money in form of dividend or re invest back in the company, which would cause the value of the company to rise.
If the company is making more money, then the value of your share is growing and when you sell it, you would want that value to be paid for your share you are holding. If someone offers you a price lower than what you feel is fair for your share, you would not sell the share.
For the buyer, the company is making good money and its growing, so he/she expects the value of the share to grow more, so they would want to invest in a company with good growth.
Companies publish their earnings report every quarter, which is why you would see big movement leading to the quarterly result or immediately after the quarterly result.
For example. this is the chart of INFY on Apr, 2023. Immediately after the quarterly result, the stock prices dropped by more than 9%.
Macro Economics
Macro economics factor affect the whole outlook of the market, however some macro economic factor affect one sector more than other. For example, a negative outlook of US market would directly affect the outlook of Indian IT companies like TCS, INFY who rely mostly on outsourced work from USA. A shortage of oil in world market would create the rally for oil refinery companies.
Lets not forget the most recent events which we all would have experienced, which affected the market in most unusual way.
This is the NIFTY daily chart for 2020, you can see the crash due to COVID-19, however it was followed by a very strong rally which lasted through 2021.
Similarly NIFTY crashed 9% over 4 days in February 2022 due to Russia-Ukraine war.
Words of the wise: Sudden macro economics changes are usually followed by strong recovery. This makes it an excellent opportunity to add good stocks to your portfolio
Changes in company fundamentals
Any change in company fundamentals like a low or high growth opportunity, competitions grabbing market share, new product launches, change in management are some of the reason which could change the outlook about the company. It may cause excitement in new buyers, leading to a rally in stock prices, or cause disappointment in existing shareholders who may want to exit their positions, leading to crash in stock prices.
Fun fact: When Steve Balmer announced his resignation, it cause Microsoft stock price to rally.
News
Any good or bad news about a company or its management can cause a stir in the stock prices. Sometimes the event following the news lead to further price movement, however if the news does not change the fundamentals of the company, the stock prices recover fairly fast to their older value.
This the chart of Adani Enterprise (ADANIENT) after the hindenburg report was published.
Conclusion
We covered some of the reason that can cause the market to move the way they do, understanding these reasons is not going to give you foresight to predict the movement of the market but it is definitely going to allow you to react faster and decide if the movement is temporary or permanent.
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