Are you new to the world of financial markets and wondering why stocks go up and down? Today we try to give you a complete answer, in fact the question is not as strange as it may seem.
The shares do not rise and fall without a precise reason, there is always a reason behind it, whether it is technical or fundamental, or in reference to some events that directly or indirectly involved that share.
What are stocks?
Let’s start our guide with a very simple question, which we need to explain in a comprehensive way the subject of this article: what are stocks?
Stocks are nothing more than financial securities that give the holder the title of shareholder. In summary, we have to think of a company divided into many small parts, which we can call participation shares. A stock is therefore a part of that society.
Are all the stocks on the stock exchange? No, in fact, a company may not even be listed on the stock exchange, regardless of its size. An example is Ferrero, a world-famous Italian giant that is not listed on the stock exchange.
These companies too can be divided into stocks and can be sold to other entities without going through a stock exchange.
What does the price of stocks depend on?
The value of the stocks may depend on different factors, but they are often extremely linked to the economic performance of the company.
In this case it may be interesting to observe some economic data of the company, in particular:
- Dividends (especially if they are issued)
- Market capitalization.
While profits are more important than revenues because they are obviously net of losses, it is true that controlling the revenues of a company can be indicative of the size of the company itself.
Releasing dividends means being healthy, remember that not all listed companies issue dividends and there are those who distribute them more conspicuously and some less.
Market capitalization is nothing more than the sum of the price of all the stocks in a company. Consequently, it rises and falls together with the stocks price.
We have mentioned these four figures, but it is important that you know that, to understand what the value of a company’s stocks depends on, there are many more.
Why do stocks go up?
We come to the main question of our topic: why do stocks go up?
The stock price goes up when there are more buyers than sellers for that stock.
In fact, this is how the market economy works, based on the laws of supply and demand. If the demand (buyers) exceeds the supply (sellers), the good (in this case the stock) increases in value.
Now that we have understood this technical part, obviously we are interested in knowing why at a given moment there are more buyers than sellers?
In broad terms we have two explanations:
From a technical point of view, a stock can go up because it has reached support or due to other technical figures visible on the financial chart.
What does “Fundamental” mean? We talk about news, events, statements and so on. The price of a stock can go up when the balance data are positive, when there are positive news about the company or the market sector.
Stocks prices could rise even when the country of origin is in a satisfactory economic condition, if it is governed well, but even if the result of the elections pleases the markets, or investors.
As you can see, there are many variations, it is up to each investor to find out more before investing his money on a particular stock. One way to get information can be eToro‘s social trading, one of the best brokers on the market that has convinced more than 10 million traders. Try it today with a demo account, you can immediately take advantage of a virtual balance of $ 100,000!
Why do stocks go down?
What we have said so far can also be extended to the fall in the price of stocks, thus answering the question: “Why do stocks go down?”
Both from a technical or fundamental point of view, stocks can go down. If from a technical point of view we invite you to read our in-depth analyzes mentioned above, from a fundamental point of view there are not so many differences from what we said in the previous paragraph.
In fact, a stock can go down if negative news arrives for the company in question or for its market sector. An oil stock, for example, could go down if there is an oil crisis. A stock of a real estate company can go down if there is a real estate crisis and so on.
Can you earn on the fall of the stocks? Yes, with some online brokers you can also invest downwards on a stocks, that is, you can earn if the tock price falls, by using derivative instruments such as CFDs. An example is Plus500, a broker that allows you to invest with CFDs on many shares, find out more by visiting the broker’s website by clicking below!
Conclusion: why do stocks go up and down?
Stocks go up and down following a multitude of factors, as we have seen. It is important to understand, however, that in finance there are no certain rules, but stocks can go up and down for always new reasons.
Financial analysts can only talk about probabilities, but never about certainty.
What can investors do? Study the stock market and understand its movements knowing that there is always the possibility of making mistakes.
What we can suggest you is to stay always informed about the conditions of a listed company before investing in it, both upwards or downwards.