What Makes the Stock Market Fluctuate

Brokers and bankers spend billions annually trying to figure out what makes the stock market fluctuate down to the smallest penny. Individual investors, on the other hand, only need to understand what makes the stock market fluctuate on a big picture level to reasonable successful with their investments. Stock market fluctuations are caused by supply/demand relationships, rumors, and perceived momentum.

In normal, rational markets stock market fluctuations should be directly related to supply/demand relationships. Where there is a greater demand for a company’s services or product (in this case stocks) then the value of those stocks should rise and vice versa. This is based on the supply demand curve rules taught in most economics and price setting classes. Thus when a stock is falling, supply/demand relationship analysis should show that there are more people trying to sell than people trying to buy, creating an oversupply of shares relative to the demand for them and causing the price to fall. This analysis can be applied to individual stocks, sectors of the market, or national markets to explain what makes the stock market fluctuate in rational terms.

However, stock markets are driven by individuals, and individuals are not always rational, logical creatures. We are influenced by what we hear from others, and we often don’t bother to fact-check everything we are told. As a result, rumors and speculation can influence our buying and selling decisions, causing stock market fluctuations that may seem baffling or outright illogical. “The markets can stay irrational longer than you can stay solvent,” pointed out analyst and market expert John Maynard Keyes, and it’s good to remember that going into an investment. If the sector is often plagued by rumors and drama, you can expect a lot of volatility and fluctuation as long as you own stocks in that area.

Last but not least, what makes the stock market fluctuate is perceived momentum. Momentum describes the trajectory of a stock, and analysts often discuss “ceilings” or “floors” in a stock’s movements. Where a stock doesn’t seem to be able to go up any more, it is said to have hit its ceiling and traders may expect it to fall dramatically. Since expectations guide reality, what traders perceive is the next logical course of action they may (consciously or unconsciously) try to make happen. It’s not necessarily logical, but it’s a form of analysis many accept as appropriate.

Trying to figure out what makes the stock market fluctuate means having a look at supply/demand relationships, rumors, and perceived momentum. Understanding these factors can help individuals avoid getting swept up in poor decision making processes of the masses and protect their portfolios.