Why Do Stock Prices Rise or Fall?

Why Do Stock Prices Rise or Fall?
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Owning stock means owning part of a company. While buying those shares can be risky, it can also an opportunity. If the company’s fortunes soar the stock's value goes up and the owner can sell them at a profit. Of course, the price may fall instead, making the owner lose money. If you know why stock prices rise and fall it might help you make decisions about whether buying a particular stock is a risk you’re willing to take.

Going Up

When a company does well in the marketplace, financial indicators such as revenue and earnings rise. When companies publicize these healthy fundamentals, their stock price is likely to rise as well. In the long run, no matter what happens to prices from day to day, a healthy, growing company's stock price should increase. Investors themselves can make stock prices rise through optimism. If the market becomes upbeat about a company’s future, demand for the stock will jump as investors value it more highly, causing the price to rise. This effect of market valuation makes stock prices fluctuate daily and weekly.

Coming Down

Of course, investors in the market can become pessimistic, causing stock prices to fall. Sometimes the pessimism is short-lived, but it can linger. It might be caused by a variety of factors, such as conditions in a company’s industry, reduced sales and profits by the company itself, or investor concern about the market as a whole. Companies with falling stock prices must prove their fundamental worth over the long term to convince investors their shares are worth owning. If the company instead looks like it’s heading for trouble, its share price falls.

Steady as She Goes

When stock prices fall, some nervous investors want to sell. That might not be a good idea, since people who hold on to stocks for the long term tend to enjoy higher returns than if they’d bought other investments. The American Association of Individual Investors recommends figuring out why a stock is falling before making a decision. If the whole market is falling, it’s not a reason to sell stocks, according to the AAII. The market changes direction all the time. Instead, assess the future prospects of the company and its industry before jumping ship.

Risky Business

You shouldn’t invest money you can’t afford to lose, the U.S. Securities and Exchange Commission warns. Always make sure to research a company before buying its shares. Practice diversification, which means spreading your cash among different kinds of investments, such as bonds and certificates of deposits. Owning stocks of companies in different industries is also considered diversification. For example, if you hold shares of a utility, you might want to consider buying stock in a health-care firm to avoid having all your eggs in one basket.