The following is a Guest Post from Isha Ray
Awareness about the various aspects of the stock market may be limited in any part of the country and among the majority of the population. However, if one was to analyse the most common fact about the share market that the people of the country know, then it would have to be the fact that the price of the stocks fluctuates on a regular basis. Based on this fact, people often make many assumptions about the market which may or may not be true on most occasions. Interestingly though, very few people actually wonder what exactly is the reason for this common phenomenon in the stock market.
The rise and fall of prices in the stock market are common. Sometimes, the fluctuation can be minuscule, whereas at other times can be quite. A lot is made of even the smallest changes at times. These can often be a cause of curiosity among beginner investors. They often wonder what the reason for these fluctuations is and who or what is responsible for these changes. Here you will find all the details and information required to give you a clearer picture of the causes and the factors. Understanding these elements will help you understand the working of the market, which in turn has the potential to help you make better financial decisions related to the stock market.
Reasons for Stock Price Changes
On a normal day, the stock market the price of the stocks do not deviate too much. On most days the level of fluctuation of prices is limited to a few percentage points here and there, with a few exceptions where the fluctuations may be higher. The buyers and the sellers in the market typically evaluate the balance sheet carefully and make their decisions accordingly. However, the sharp rise and fall of the share prices can be caused by financial or non-financial happening in the country or around the world. In order to stay up-to-date with such events, it is imperative that the investor consult the earnings report. The earnings report can be a good source of information regarding good financial news as well as bad financial news. A good example of events having an impact on the price of the shares can be an interest rate cut or hike.
In some occasions, nature too plays a role in determining the price fluctuations of a particular set of stocks. While a natural disaster like a hurricane, cyclone or an earthquake can mean stocks of a certain group plunge, other sectors can have a positive impact too.
The flow of money into or out of the market can impact price fluctuation too. Generally, fluctuation in price occurs when a certain percentage of money flows into the market at a specific period of time and does not take a long-term view of the enterprise. The volatility in the stock market is one of the perennial features of the stock market and such is the nature of the market, that based on these people tend to make or lose money. Hence, there is no way of avoiding the inevitable rise and drop in prices.
Thus, it is best to accept the fact that it will happen and create a strategy around that. Most intelligent investors have a strategy, in most cases for the long-term, so that they can make profits even if there is a sudden dramatic change in the price of a group of stocks. Others tend to follow and predict the events that could affect the stock market in advance and change their strategy. This is not necessarily a good option, as traditionally, it is always in the best interest of the investor to stick to the strategy no matter what if the investor is thinking in the long run. For short term investors, the story may be slightly different.
Impact of Price Fluctuations on the Market as a Whole
It is a well-known fact in the market that during the times of volatility, several professional firms tend to implement procedures which are specifically designed to minimise the exposure of the firm to severe market risks. Similarly, execution of security during volatile market conditions with high volume is also significantly different. The following are certain impacts of volatility on the market conditions –
1. Delays: When the market experiences volatility it also usually has a high volume of trading, which has the propensity of causing delays in executions. This type of delay also can mean that the prices could be different from the market prices that was quoted when the order was initiated. Thus, it is very important for the investors to question the firms as to how the market makers plan to handle order executions in times of market volatility. Although with the advent of online trading the norm is to get quick execution at prices more or less close to the displayed quotes on the mobile phones, tabs, computers, etc., this is not the case 100% of the times.
2. Breaking Down of Digital Services: When the market receives a sudden change, be it a boost or a nosedive in prices, there is bound to be a lot of activity. Under such circumstances, it may become difficult to trade over the internet as it can cause difficulty in accessing your accounts caused by excessive internet traffic. Otherwise, it may also be difficult to execute trades due to limitations of the capacity of the system that you may be operating. It is for times like these that the majority of the online trading companies offer services like phone trades or connecting to the broker over other mediums to place an order. Thus, you should be aware of these facilities, before fluctuations so that you can take swift action in such circumstances.
3. Wrong Quotes: You must be very careful with the quotes that you receive as there is a possibility of difference in the received quote and the actual price of trade execution. When the market is experiencing volatility, even real-time quotes could be different from the current condition of the market. Such deviations can not only happen to the price of the stocks, but there is a possibility of deviations in the number of available shares at a specific price as well.
Severe price fluctuations in the stock market have a tendency to cause a lot of panic and action in the market. One should be well prepared for such situations, as people often end up making the wrong choices in the heat of the moment. This should be avoided by learning how to trade stocks in times of volatility. Preparedness can help an investor turn a negative situation into a positive one.