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Why are stocks down?

Why are stocks down?
Asked by
Curtis Davis categorie-icon time-icon6 months ago

Justin Freeman
Answered time-icon6 months ago

Uncertainty can be a major influence on the performance of stock markets. If investors become nervous about a particular sector in the market, then a sell-off can result and the price of shares will fall. That in turn creates more uncertainty and further selling will take place causing prices to drop further.

Major price fluctuations in stocks and shares are also caused by news announcements that prompt investors to either buy or sell their holdings. They can be about the fortunes of individual companies, the chancellor’s budget speech, the health of national economies, world economic recession or major unforeseen global events.

The release of news that is seen to impact a particular company’s fundamental valuation negatively will almost certainly cause its share price to fall. A company that distributes quarterly performance reports to the public is likely to see the price of its stock fall on the announcement date if the figures in the released reports are poorer than what the market and shareholders were anticipating. As reporting dates are known in advance, price volatility can be expected around those days as projected and actual returns are compared.

Other events that are more random but are still specific to a particular stock might impact the price at any time. Events of a more unforeseeable nature could range from the sudden announcement that the CEO has departed to news breaking about failures relating to a particular product.

Shares will also fall in price if the market as a whole is experiencing a sell-off. International level news events such as the announcement of an escalating trade-war between major economies could be interpreted as being bad for the economy of a particular country. As a result, that market is likely to lose value.

Sub-sectors within an economy might experience specific losses according to changes of government policy; for example, housebuilders and real estate brokers can see their share price fall upon announcements that taxes on property transactions are to increase dramatically. Even during market-wide sell-offs the relative performance of the different sectors is a subject worth studying to gain a clearer understanding of the nature of markets.

If you are keenly monitoring your portfolio and you can’t reconcile a price move, then bear in mind the possibility that a stock price might have moved due to some kind of Corporate Action. From Dividend Ex-Date onwards buyers of a stock are not entitled to receive any announced dividend. If the dividend is 20p in value, then the buyers will adjust their prices down by that amount and the stock will trade at that lower level.

It is worth noting that typically stocks rise gradually and fall suddenly, the below graph of the Dow Jones Index price is taken from and shows a big down day (long red candle) on 10/10/2018 which demonstrates this point.

Sell-offs, stock market crashes, and what more optimistic commentators refer to as ‘realignments’ are more dramatic in nature than the gradual rise associated with rising markets. That often makes falling stock prices appear more newsworthy and is therefore more likely to bring your investment portfolio to the front of your mind. But when stocks are falling it is worth recalling your investment aims and the investment strategies you are using to attain them.

Losses on long positions can be limited through the use of stop losses, and by flipping things around and selling short the market is a way to make a profit from downward market moves. Importantly a lot of investment strategies regard downward market corrections as an opportunity to buy at lower levels.

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