Why do stock prices fall? There are numerous reasons for that. Fortunately, they can be divided into a few big groups. Below, you will find five reasons why the stock market or shares of a particular company might plunge.
1. Political and economic issues
Сrucial macroeconomic and political events drive stocks, as they are one of the riskiest and most sensitive assets. In such periods stocks plunge as investors withdraw funds from the market and transfer them to safe-haven assets—such as metals and bonds.
You may wonder how to predict such events and prevent the negative effect of falling share prices. The answer is to look for blue chip companies that survive even during crashing markets.
Mellody Hobson, the president and co-CEO of Ariel Investments, the chairwoman of Starbucks Corporation, and the former chairwoman of DreamWorks Animation, said: “We don’t prognosticate macroeconomic factors, we’re looking at our companies from a bottom-up perspective on their long-run prospects of returning.”
2. A country’s economy
Another factor that can affect the stock market is the country’s economic conditions, including the inflation rate, taxes, monetary policies, and the strength of the domestic currency. These metrics can affect the economy as a whole or a particular industry the company relates to. Therefore, investors closely follow economic data and consider the news related to the industry or sector the company performs in.
The father of value investing, economist, and professor Benjamin Graham said that an “individual investor should act consistently as an investor and not as a speculator.” This means that if you enter the stock market, you shouldn’t try to forecast what will happen. All your decisions must be based on facts and analysis.
3. Negative earnings report
Stock traders and investors pay close attention to companies’ earnings reports, which sum up the essential data that reflect the company’s health. Usually, it’s not a surprise what data can appear in the report because there are forecasts of leading market analysts and corporations that investors can evaluate in advance. If the forecast is negative, stocks may decline before the release.
The trickiest thing is to assess how the real data correlates with the estimates. Even if the actual data is better than the forecast but is much lower than the last quarter’s figures or year-over-year data, the stocks are more likely to plunge.
4. Major shareholder selling
It’s common for a company’s owners and large shareholders to sell their shares. Regardless of the reasons behind the sale, traders and investors consider it a negative factor. First, it’s unlikely that someone would get rid of a successful business. Second, if the owner or major shareholder participated in the company’s management, there are uncertainties about the development of the company after they leave. Third, an increase in the shares available in the market damages the supply/demand balance.
5. Internal issues
Why do stocks drop? Internal company issues can be a reason. For instance, corporate misunderstandings of a conflict among top management may lead to a stock sell-off, as the company’s future will be affected if they leave.
Also, investors closely follow mergers and acquisitions. If the company merges with a suffering business, it may be a negative sign for investors, as the negative metrics of the latter may affect even a stable firm.
History shows the stock market crashes and recovers. It’s more likely you won’t be able to predict large market sell-offs, as they usually happen unexpectedly, and only big players in Wall Street can project them. The best decision is to invest in stable companies. However, you can always predict falls in particular companies by analyzing data and news.
Top 5 reasons for a stock slide, Investopedia
The Top 25 Investing Quotes of All Time, Investopedia
Stock Market Crash, CFI