Definition of a Spike in the Stock Market

Definition of a Spike in the Stock Market
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A spike in the stock market can refer to a sharp rise in the price of an individual stock, commodity, precious metal or other asset, or a significant increase in a market index, such as the NASDAQ, Dow Jones Industrial Average or S&P 500. Some people refer to a large downward drop as a spike, as well.

Based on what happens when a market spikes, you might want to buy, sell or hold your investments. Using sell orders, you can limit your potential losses, or get out after you’ve made a specific profit or return on your investment.

What Are Indexes?

In order to judge the performance of an economy or economic sector, financial experts have grouped certain stocks to help give a representative indication of performance. The groupings, which create an average value for the stocks, are called indexes. For example, the Dow Jones is an average of 30 “blue chip” stocks in a variety of industries. The NASDAQ is composed of 100 stocks, with a heavy inclusion of technology sector stocks.

What Is a Market Spike?

A spike in a stock market index occurs when the value of all of the stocks in an index (which creates the index’s average) dramatically rises or falls. If the U.S. Federal Reserve Bank raises or lowers interest rates and/or gives a warning or positive projection for the near-term performance of the economy, stock prices might quickly rise or fall.

On some days, the value of the Dow Jones can rise or fall 500 points or more. The NASDAQ might see a large percentage spike, while other indexes aren’t affected. Other factors that can cause spikes are wars, weather-related events, a presidential election, terrorist attack or market sector collapse.

What Is a Price Spike?

When the price or value of a particular investment quickly rises or falls, that’s considered a spike, or "price spike," meaning it may be a good time to buy or sell. In 2021, new and hobbyist investors caused GameStop’s stock to go from ​$13.66​ share on December 9, 2021, to a high of ​$483​ on January 28. That same day, the stock plunged back down to ​$112.25​. During the following weeks, the stock continued to go up and down in large spikes.

If you’re interested in getting in on an IPO or jumping on a meme stock or other hot trade, consider putting a stop-loss order or trigger on your account so that if the stock reaches a certain price, it will automatically be sold by your broker or e-trading account or app. This can help you limit a potential loss, or let you cash out when you’ve reached your profit goal. You can re-set triggers as your stock rises to further protect your investment.

Watch for Bubbles

Market sector collapses occur when an industry, such as housing or tech, is overvalued because of solid long-term performance, leading investors and advisors to wishfully want the profits to keep rolling in. At some point, the sector faces hardships and its true value spooks investors into selling.

The tech bubble burst during the dot-com boom, leading to a downward market spike in 1999. The collapse of the housing market beginning in 2007 led to the Great Recession and stock market plunge beginning in 2008. This is where the "drastic spike" meaning comes from.