Declining revenues could be the result of several factors, such as losing major customers to competitors, obsolete products and distribution channel problems. Profit margins decline because of falling revenues, rising expenses or a combination of the two. Falling revenues and margins also lead to cash flow problems, which might raise questions about a company's ability to finance growth and pay down debt.
Stock market volatility often leads to stock price declines across the board, even for companies with strong business fundamentals. Market downturns could be due to several reasons: changes in the economy, profit taking after strong rallies, and geopolitical events. For example, the markets regard the prospect of rising interest rates negatively because higher rates could lead to higher operating expenses, lower margins and overall economic weakness.
An entire industry sector might experience stock price drops even if only one company in the sector hints at weakening fundamentals. For example, investors might abandon technology stocks altogether if a large technology company reports weaker-than-expected profits.
Similarly, economic weakness in Asia or Europe could affect stock prices everywhere, as could civil strife and terrorist incidents in regions of global economic importance, such as the Middle East. Corporate restructuring actions can depress stock prices. This should increase earnings right away. It may not be a red flag, just a reaction to a slower economy.
A similar phenomenon can occur when a firm has to make huge pay outs in compensation for past mistakes. That sounds bad.
But this huge loss was mainly down to one-off costs, like paying off PPI and the cost of discontinuing operations. With that nasty business out of the way and a simplified structure the bank can focus on improving returns.
So rather than the headline big losses causing a fall in share prices, there was actually an increase as investors looked to the future. To complicate matters further, there are other factors that affect how the markets respond to any piece of news. For example, reaction may differ depending on whether the economy is in the expansion or contraction phase of the economic cycle.
Imagine data shows the economy is recovering. That sounds like good news. But investors may anticipate a withdrawal of quantitative easing QE — the act of pumping money into markets to stimulate the economy , or a hike in interest rates, as a result. The basic concept of stock market movements is fairly simple. In many instances, a stock's share price declines after better-than-expected earnings are reported.
Investors need to know that there is a reason for the decline in share price. It just might not be an obvious reason. There are five major reasons why a share price may unexpectedly decline :. Some institutional shareholders set a target to sell their stock at a given price or if a certain event transpires. The end result is that the supply of shares available for sale after the event transpires usually depresses the share price. How can the average investor tell if a major shareholder is unloading his or her position?
The answer can be found in the individual trade volumes on the tape or time and sales reports. For example, while individual investors typically make trades in the hundreds or low thousands of shares, institutions such as mutual funds often sell stocks in the tens of thousands of shares — or, even in rapid fire, in low volumes of 3, or 4, shares. Take a look at the data and try to determine whether institutional selling is indeed driving down the share price.
Once the selling is over, assuming the company's fundamentals remain intact, the stock price often jumps back up again fairly quickly. This creates a great buying opportunity for the long-term investor. Sometimes a sell-side analyst will put out a negative research note on the company either just before or just after earnings are released.
This report even if it is only slightly negative in nature can affect the way that firm's clients think, especially those that are more short-term oriented. In any case, as a result of the analyst's commentary, some selling pressure often ensues. While individual investors may have trouble accessing these reports, large news outlets will often announce that a brokerage firm report has been issued, or the firm itself may release some information about the existence of the report to the general public.
Again, the savvy investor may be able to use this information as a buying opportunity once the selling pressure subsides, assuming that there have been no fundamental changes in the company. Oftentimes, a company will beat the average Wall Street estimate, but fail to meet or beat the whisper number. As a result, its stock price falls. The whisper number is simply an unofficial estimate, or rumor, that is circulating around Wall Street.
Besides being aware of what that number is, there really isn't much an investor can do to defend against this. The stock market can present an easy and quick opportunity to make your wealth multiply.
The main goal of trading on the stock market is to buy stocks and sell them at a profit. This is what results in earnings on the stock market. One key factor that may hold one back from beginning to trade is the constant fluctuations of the market. You may be apprehensive of trying your hand at trading, owing to the volatility of the stock market. To understand the fundamentals of trading on the stock market , we give you a quick snapshot on how stock prices are led to fall or rise.
Once understood, you can begin keeping an eye out for the factors responsible for fluctuation and will, therefore, be able to trade with confidence.
Stock market prices are affected by demand-supply economics. In simple words, when demand for a stock exceeds supply, there will be a rise in the price of a stock. The more drastic the demand-supply gap, the higher the price.
For example, when many traders are buying stock X, stock X's price per share will increase.
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