why the stock market goes up and down ?

Answer 1

This is a very good question where there can be no simple answer. It is a little like asking why some tonardoes appear in some places and behave in a certain way. While we do know some facts, not all are conclusive. That is why there have been so many attempts to model and explain the behavior of the stock markets... to no avail so far. (the latest ones who won nobel prizes almost crashed the stock market with their model.)

That being said, a general and simple way to explain why the stock market moves up or down is...

Investor Sentiments.

When investor sentiments are bullish and everyone think that the stock markets will do well due to some political or economical factors, more people will get involved in the stock markets or to put more money into buying shares. That creates an increase in demand and thereby pushing prices higher and higher. This is very much like in an auction house where items that have few bidders usually go for lower prices and items that have a lot of bidders usually go for higher prices.

Conversely, when something happens to the economy or in the politics and investors start taking their money out of the stock market due to negative sentiments, prices starts to drop and hence the overall market.

This is an oversimplistic explanation but it kind of rounds up the main idea. Making this simple concept complicated would be the the question of who is buying when everyone is selling and who is selling when everyone is buying? Isn't the stock markets a zero sum game? Yes, the stock markets is a zero sum game and when investor sentiments are bullish and buying, someone is selling to them. So, how does that make the market move? Well the thing is that there are a lot of dynamics in the stock market that create a situation whereby there will always be people who are committed to buying and selling at the same time and much of this dynamic is created through derivatives. Going that far would make this post a hundred page one. :)

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Hope this helps.




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Answer 2

So far, no one has answered this question. It is my area of academic research.

First, it is important to remember that money in the stock market is "extra" money. You can only do two things with money, you can save it or spend it. If the choice came between eating and investing, eating always wins. Further, because stocks are "residual claims," or put simply shareholders claims are met only after all other claiments needs are met (employees, customers, creditors, politicians), people place less money in them than other investment classes. People are happier with their home or with debt instruments with their higher order of safety than stocks.

So, if anything disturbs people's sense of safety, there is a tendency for existing shareholders to try and exit simultaneously.

Now there is a problem for shareholders, every trade requires a buyer and a seller. If you are an existing holder who wants out, and at the same time, a lot of shareholders want out, and few new people want in, then you must offer lower and lower prices to find a buyer willing to take your shares. Prices fall until all trades clear and the number of buyers and the number of sellers stabilize and the price stabilizes. (Just a note, I am using number of buyers and sellers but in actuality it could simply be a few very large buyers or sellers that could swing the balance, dollars available vs shares available is what really matters.)

Likewise, people may feel a particular firm is a very good bet and acquire a sense of safety about the firm and many people want in, but few already in want out. So the price rises until someone finally decides they cannot pass up on the stated price.

Finally, the mutual fund buyers and sellers gum up the works. Mutual funds do not work like other companies. When you buy shares in IBM you must buy from an existing shareholder. When you buy shares from Fidelity Magellan they issue the shares on the spot. Likewise, when you sell shares of Fidelity Magellan, they are the only legal buyers possible and they cancel the shares and give you the money. This is important because when you buy shares in a mutual fund you are effectively giving a market order to the fund manager to go to the floor and bid for you until you are the high bidder, regardless of whether that makes sense. Likewise, when you sell, the manager is effectively instructed to go to the market and bid until the fund is the lowest bidder in the market. New money in or old money out in funds are disruptive because the people making the choices are often people who lack the skills to know what to buy. This means fund managers who should not be engaging in trades (had only professional judgment occured) are engaging in trades because of cash flow changes at the fund. The managers do have discretion, but liquidity tends to happen in such a way that managers really need to engage in trades immediately.

So mutual funds increase the swing because they are often blind purchases by the owners or prospective owners and trigger buy or sell at all costs behavior.

I will provide an example of this. Imagine you decide to buy an index fund, say Vanguard's Index Fund. You make a $100,000 purchase. This requires the fund manager to make, along with other people's purchases, 500 small purchases regardless of whether each of those individual purchases make sense, because index funds do not have discretion to do what makes sense. Likewise, if you bought $100,000 worth of Fidelity Magellan, you have given $100,000 that must be invested. While that manager does have discretion, the manager must still layoff $100,000 today even if the available choices are pretty poor. Finally, imagine you bought a tech only fund or a gold only fund or any sector fund. Even if that sector is extremely over or under priced the manager must lay off that money in the market even if continued investment in that market makes no sense.

Markets are very good at adjusting prices to fit the available demand and supply, but sometimes that demand or supply doesn't make sense.

So there are three factors:

1)The impact of residual claims.
2) The nature of the markets.
3) Blind money.

Answer 3

Supply and demand. If there arent enough people to buy the stock or there are too many people selling then the stock price will go down. Vice versa, if there are more people wanting to buy the stock then there are sellers then the stock price will go up.

Answer 4

nicely, i'm no longer an Investor, yet would not the inventory marketplace continually bypass up & down? and each inventory differs. yet, we are nevertheless in a recession, for a while to return, so in my opinion, shares will the two bypass backpedal or selection, as they regularly do.

Answer 5

For the same reason that people fall in and out of love. Human psychology, man

Answer 6

politics