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Why Prices Rise and Fall in the Stock Market

Why Prices Rise and Fall in the Stock Market

30th November 2019
Updated: 9th July 2020

Prices of stocks move up and down whenever the market is opened. These price swings are usually the result of fluctuations in forces of supply and demand in the overall market.

If more people want to buy a given stock, then its price will edge higher. Conversely, whenever the majority believe security is overpriced, selling pressure builds up, triggering a slide in the underlying price. Investor sentiments thus play an important role when it comes to price swings in the market.

Below are some of the key factors that cause prices to rise and fall in financial markets:

Marketplace Imbalance

The stock market comprises a congregation of people with varying views of what the price of a given security should be. Therefore seller supply and buyer demand meet in the market, sometimes resulting in an imbalance that causes price swings in one direction or another.

Supply and Demand

Forces of demand and supply are the biggest triggers behind the price swings experienced in financial markets. Whenever demand for a given stock exceeds supply, translating to more buyers in the market compared to sellers, the underlying price will move higher.

Conversely whenever supply outpaces demand, translating to more sellers in the market than buyers, the price of an asset will head lower.

Interest Rates

The disparity in economic policies also affects prices in financial markets. For instance, a rise in interest rates will often trigger demand for income-generating securities such as bonds. Stocks in turn tend to underperform in times of rising interest rates. On the flip side, stocks will often rise when interest rates are declining.

Dividend Offerings

Dividend offerings have a significant impact on how stocks perform in the markets. When a company issues a dividend offering, that often underscores solid economic performance and underlying growth metrics. Likewise, investors sometimes buy stocks in anticipation of a dividend payout, which can result in an increase in their underlying price.

Economy and Political Climate

The health of the economy, as well as the political climate, often affect investor sentiment, triggering price swings in the markets. Economic fluctuations often referred to as booms and recessions negatively affect investor sentiments, triggering huge uptrends or sell-offs in the stock market.

Whenever the economy is doing well, the price of most stocks will often rise. In times of recession and concerns about the economy, prices will often trend lower.

Political tensions can also affect investment patterns in financial markets. When an economic powerhouse is at peace with its allies as well as rivals, investor sentiment tends to tick higher, resulting in a spike in prices. The reverse is also true.

News Events

News events often trigger emotions among investors, consequently influencing investing decisions. Negative news can cause investors to sell stocks. Bad earnings reports, as well as economic and political uncertainty, negatively affect investment patterns, which can result in sell-off pressures in the markets.

Positive news such as strong earnings reports on the other hand can strengthen investors’ confidence, triggering a surge in buying among stock investors.

By Harry Atkins
Harry joined us in 2019 to lead our Editorial Team. Drawing on more than a decade writing, editing and managing high-profile content for blue chip companies, Harry’s considerable experience in the finance sector encompasses work for high street and investment banks, insurance companies and trading platforms.
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