Why Do Stock Prices Fluctuate?

If you are new to the stock market, it is an important fact to know that just as the weather of Amazon, the prices of stocks are never stable. They can change from time to time, and thus you must assess your investment objective and risk appetite before investing. 

Let’s see why stock prices fluctuate and the factors that cause it. 

What Is Stock Price Fluctuation? 

Just like any other product, the prices of shares fluctuate based on their demand and supply. During limited supply, prices of stocks rise; on the other hand, when fewer investors are willing to invest in a stock, its supply increases, resulting in a fall in its price. 

What Factors Cause Stock Price Fluctuation?

Here are some of the main factors that influence stock prices:

• Demand and Supply

A significant factor that influences stock prices is their demand and supply. The reason behind it is that this market functions like an auction. 

If there are more buyers compared to sellers, a stock’s price generally rises facilitating relatively more trades. Investors who previously had no interest in selling get attracted by the upward price movement and end up selling their stock. 

• Liquidity

Liquidity is also an important thing to consider while investing in the stock market. It is the ease at which an individual can trade a stock without incurring any loss in value. 

If investors can’t sell a stock easily without losing value, it means that they might get stuck with the losses in that particular stock. If investors notice a downward trend in a stock’s trading volume, they might sell them, resulting in a price drop. 

• Market Sentiments

This factor represents how a majority of the investors feel about a particular stock in the market. It has a direct effect on the trading activity of a stock and, thus, its price. Investors and traders primarily measure it by using trend analysis techniques. They also use moving averages, volatility indexes, etc., for stock analysis. 

• Positive or Negative News About a Company

Any news relating to a company, may it be good or bad, can have an impact on its stock price. Usually, positive information about a company gives investors more confidence in its growth and future performance and thus causes a rise in its price. 

On the other hand, any negative news on an organisation might make shareholders lose confidence in the company. This, in turn, results in a selling pressure on the stock and ultimately a fall in the stock’s price. 

• Undervaluation and Overvaluation

The terms undervaluation and overvaluation are perceived by investors when they think that stocks are not valued correctly, and their prices are likely to move in the direction of their intrinsic/fair value. 

Investors generally call a company’s stock to be undervalued when its stock price is lower than it should be, and they anticipate a rise in its market value in future.

However, when individuals deem that a particular stock is overvalued, they consider its price to be higher than it should be and predict a fall in its value. 

How to Deal with Fluctuating Stock Prices?

Here are some trading strategies that may help you deal with the volatility of stock prices:

• Choosing Only Quality Stocks

An excellent way to deal with stock market volatility is to purchase quality stocks. There are many companies that have solid fundamentals and have shown stable growth in the long term. Doing so may cause your stock portfolio to slow down for the time being; however, in the long run, it will provide protection to your capital along with stable returns. 

• Purchasing Good Quality Stocks During Dips

There are certain companies that are leaders in their respective sectors. Over the course of time, their stocks might dip in price, but after every correction, they manage to regain their value. You should take advantage of this volatility and consider adding such stocks to your portfolios. 

• Restructuring Portfolio During Volatile Market Conditions

You should make use of stock market volatility and add stocks of a more stable nature to your portfolio and reduce exposure to high volatile stocks. Portfolio restructuring will ensure that your capital stays protected when the market is falling. 

Final Word

Volatility is an integral part of the stock market. Stock prices change every second of every trading session, which is why it is crucial for you to assess a stock’s performance minutely before investing in it. You should take into account multiple macro and micro-economic factors before starting your investment journey. 

Frequently Asked Questions