Common Reasons for Stock Price Fluctuations

Stock prices often swing up and down, sometimes sharply. The best way to cope with this volatility is to first understand why markets move the way they do. Here’s a roadmap to the reasons stock prices can surge or come crashing down.

Common Reasons Behind Stock Price Fluctuations

Fundamental Factors:

1. Internal aspects of a company: The stock prices of a company depend on its wellbeing. A company that’s faring well has a higher stock value and vice versa. Stock prices may change if a company makes huge profits or undergoes a takeover. A scam or bankruptcy will negatively affect its stock. Internal changes are also likely to change its share prices.

2. Reserve Bank of India (RBI) policies: The RBI updates its policies every few months. Stock prices may fluctuate because of changes in such policies. Alterations in the repo and reverse repo rates generally affect the Indian stock market.

3. Value of Indian currency: Changes in the Indian currency exchange rate is another reason behind stock market fluctuations. When the rupee is strong, some companies—mainly those dealing with exports—benefit. Their stock prices shoot up. The opposite happens with the firms that work on imports. Changes in the exchange rate result in market volatility, which leads to price fluctuations.

4. Political scenario: When a significant political event takes place, the stock market may witness major fluctuations. The market stays stable when the political scenario is calm. Recession, oil prices, war, and the health of the global economy, among other things, also influence stock prices.

5. Natural disasters: Natural disasters like an earthquake or floods bring volatility to the stock market. This mainly happens because such events lead to depleted production. The companies suffer, and their share prices plummet.

Technical Factors:

1. Demand and supply imbalance: Stock prices are also driven by basic demand and supply dynamics. When more investors want to buy a stock than sell it, the excess demand pushes its price up. Conversely, if selling pressure is higher, prices tend to fall. These imbalances often create short-term volatility even if the company’s fundamentals remain unchanged.

2. Price and volume trends: Traders closely watch how a stock’s price moves alongside its trading volumes. A rising price with strong volumes usually signals investor confidence, while falling prices with high volumes may point to heavy selling pressure. These patterns often influence short-term price movements, as they reflect the underlying market sentiment and momentum, even before any fundamental changes in the company or economy take place.

3. Support and resistance levels: Stock prices often move within certain ranges. The support level is the price point where buying interest tends to emerge, preventing the stock from falling further. The resistance level is where selling pressure builds, capping further upward movement. Traders track these levels closely, as a breakout above resistance or a fall below support can trigger sharp price swings and influence short-term trading decisions.

How to prepare for stick market fluctuations?

Market fluctuations are unavoidable, but a clear strategy can help you manage volatility:

• Stay informed: Keep track of market news, RBI policy changes, company earnings, and global developments. Awareness helps you anticipate possible movements rather than being caught off guard.

• Diversify your portfolio: Don’t put all your money into one sector or stock. Spread investments across industries and asset classes like equities, debt, and even gold to balance risk.

• Adopt a long-term view: Short-term volatility is normal. Focus on your long-term goals and avoid making hasty decisions based on daily market movements.

• Use stop-loss orders: For active traders, placing stop-loss levels ensures you automatically exit a position before losses spiral out of control.

• Manage emotions: Fear during downturns and greed during rallies can cloud judgment. Stay rational and stick to your plan.

• Review and rebalance: Regularly check your portfolio. If one asset class grows too large or too small, adjust it to maintain balance with your goals.

How to mitigate risks from stock market fluctuations?

While you cannot eliminate market volatility, you can take steps to minimise its impact on your portfolio:

• Invest systematically: Use tools like SIPs (Systematic Investment Plans) to invest regularly. This averages out the cost of buying and reduces the risk of timing the market.

• Maintain liquidity: Keep some funds in liquid assets or emergency reserves. This ensures you don’t have to sell stocks at a loss during downturns.

• Diversify smartly: Spread your investments not just across sectors but also across asset classes – equity, debt, mutual funds, and even alternatives like gold.

• Set realistic expectations: Don’t expect the market to always deliver quick or high returns. Accept that volatility is natural and returns even out over time.

• Hedge where possible: Advanced investors can use derivatives, such as options, to hedge against sharp declines.

• Seek professional advice: If unsure, consult financial advisors who can guide you with strategies aligned to your goals and risk appetite.

Summing Up

Stock market fluctuations are part of your stock investment journey. Staying updated with market news and trends ensures you’re better prepared to make informed decisions. With the right knowledge and discipline, your hard-earned money can work smarter in the market.

Also Read

https://www.kotaksecurities.com/investing-guide/share-market/how-is-share-price-calculated/