Individual stock prices, and the market in aggregate, move up and down, a process known as volatility. A price or market with great fluctuations is often termed “highly volatile.” In these cases, the risks, as well as potential rewards, investors take are immense. While there are obvious causes of price movement, there are many that are more subtle and yet remain significant in the life of a stock.
Supply and demand is the single, more obvious reason for stock volatility. When a firm's stock is in demand for whatever reason, the price will go up. When a firm issues additional stock for sale -- rather than to its existing shareholders -- the price will naturally go down.
Inflation worries investors since the value of their assets goes down as the dollar loses value. Many investors will quit the market rather than see their profits eaten away by inflation. In addition, inflation harms the ability of consumers to buy products that are now more expensive, so the economy as a whole begins to sink. In some cases, this depresses the stock market, and many firms see their values go down. However, firms that do well in inflationary times, such as firms dealing in gold, will see their stock price go up.
Interest rates are connected to inflation, since the conventional wisdom holds that higher interest rates remove cash from the economy and, hence, lower inflation rates. Any sudden moves in the prime rate of interest can cause problems in the market and see stock prices go down. The stock market is anticipatory in that it always looks to the future. In some cases, an increase in the rate of interest can cause a speculative bubble since may traders see the increase in the cost of money as indicative of later demands for cheaper money and hence, a flurry of new borrowing. This, in turn, can cause many forward looking traders to pump more cash into the market, leading to general price rises.
Media manipulation has always been an important part of market price flux. If a firm is seen to be “booming” or “taking off,” this might raise the price of the stock as many investors seek to buy it. If a firm is involved in a scandal, such as an embarrassing recall, many investors will dump that stock, leading quickly to a reduction in the stock's price and value. If a firm gets much positive media attention, this alone can lead to a great deal of interest in the firm, leading to a higher price for the stock.
The price of energy is well known to have an effect on stocks. High energy prices lead to a struggling economy as transportation and other costs take up more of domestic budgets. Stock prices can fall as oil prices go up and cash is being taken out of the market. Goods become more expensive as transport cost rise, leading to problems in the economy that can depress prices.
Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."