A Wall Street pro will always give you the classic answer to why your stock went down: "More sellers than buyers." Though that answer may sound like a brush-off, it is the most basic truth there is, and gives you great insight into the workings of the stock market. Stock prices go down because of company revenues, business outlook, analyst downgrades and simple market corrections. Sometimes wonderful news about a company triggers a sell-off, which is most frustrating for an investor. To understand why stock prices fluctuate, consider that their prices are a reflection of human action and reaction.
Technical analysis of stock price charts studies where a stock has been and applies tools to determine where it is likely to go in the future. The tools are based on evaluation of volume of up trades versus volume of down trades, the number of trades up and down and support and resistance points. Theoretically, if a large number of shares are bought at $10 and the stock declines to $5 before rising again, those who bought in at $5 are delighted to sell to take profits at $10, and those who have been holding the stock through its dip down are anxious to sell out at $10 where they originally bought in, fearful of losing money. This creates a resistance point, and the stock will generally drop back a few dollars and later run up to retest the resistance point before trading higher. It trades up through resistance because the selling interest has abated. The support point was at $5, where some traders thought the stock had value. As long as traders are willing to buy at $5, the stock will bounce off that support point. However, if it fails to trade up through the resistance at $10, it may drop to a lower support point on its next consolidation.
When the company announces its revenues per share, if they are better than the analysts have predicted, the stock price usually rises. This is because the stock price has already discounted the analyst predictions. If the revenues did not quite meet analyst expectations, the stock price will likely decline. Sometimes the stock price declines even though revenues exceed analyst expectations. This is an example of a Wall Street standard practice, which is to sell on good news -- take profits before bad news is announced since many companies will try to hide bad news by announcing it after an announcement of good news has excited the market.
When a company wins an important contract or a product is approved by a regulatory authority, the stock price will rise in anticipation of increased revenues as a result of this good news. The stock will drop if a big customer is lost because this is seen as negative for earnings. Events affecting an industry result in rising stock prices in that industry, for example, declaration of war will help munitions stocks. Alcohol and tobacco stocks perform well during recessions.
Analysts and Rumors
A downgrade by a stock analyst is negative for the stock price. Even a seemingly positive move from a recommended "strong buy" to a "buy" can be considered a sell signal. Analysts rarely issue "sell" recommendations because modest downgrades have the same result. Rumors also move the market. They often are created and spread by a trader who has a large long or short position in a stock and needs the market to move in his favor. The effects of rumors are generally short-lived, but they can do damage to those who are scared by the unexpected move and sell out their positions in panic.
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