Why Does the Stock Market Price Rise and Fall

The question about what moves the tock market is quite complicated. There are several visible and invisible factors that cause the rise and fall in stock market. There are several issues on political, economic and social level that include inflation, change in interest rates, earnings of the people, oil and energy prices, war, peace and terrorism, political and domestic situation and so on. While some of these factors may have long-term consequences for the stock market, others may have only short-term implications.

What, however, drives the market crazy is the uncertainty factor. What the stock market is most sensitive to is the surprises. When something unusual occurs in the country, the stock market immediately reacts to it. Stock market radars are extremely sensitive to changes.

This can be illustrated by an example. If the Federal Reserve Board's Open Market Committee-Fed- thinks of raising the interest rates by one quarter percent, the stock market will not react much. If contrary to the expectation, the Fed raises the interest rate by one-half percent, the market will feel shocked.

So any news which can surprise the market can rattle it, be it on the economic front, terrorist attack and similar other incident. If the news is really good, it also shows its impact in form of rise in stock prices.

The cumulative effect of these factors, whether good or bad, creates market phases such as bulls phase, bears' phase or secular phase.

A bull market is also referred to as a bull run. A bull market is characterized by a rise in stock prices. It keeps most investors happy. It creates and strengthens their confidence and makes them optimistic about the returns on their investments. Therefore they tend to invest in stocks in the hope of making big in the near future.

A notable example of bull market was in the 1990s when the US and several international markets had a very happy time because the financial markets went up very rapidly. The US stock markets had a bull run from 1983 to 2007 except for brief periods of slumps.

Bear market is associated with fall in prices and lots of pessimism. Investors fear losses. A negative sentiment prevails in the market and investors want to sell their stocks fearing further downfall.

The most glaring example of bear phase in the history of United States was after the Wall Street Crash of 1929 that continued from 1930 to 1932 generating what was called the Great Depression. A milder version of bear market occurred from about 1973 to 1982 when the economy became stagnant. It resulted in energy crisis and high unemployment in the early 1980s.

A bear market is often characterized by the constant price fluctuations. A bear market does not mean just a simple fall in stock prices. It may result in substantial price fall. Although you cannot give a clear definition of bear market, it is often characterized by a fall in price by around 20% in a period of two months. A recent example of bear market is current state stock markets of world in the year 2008.

A bear market should not be confused with a period of correction. Correction also results in fall in stock markets, but a period of correction is usually short lived. Moreover correction usually occurs during the bull phase. The price fall does not surpass 15-20%. The bear markets last longer and suffer much greater price falls from top to bottom.

A period of correction in stock prices is usually a welcome opportunity for smart stock market investors. They try to buy high value stocks when most people try to sell them away at reduced prices. The profit from their sales as soon as the correction period, which is usually short lived, is over.

When the stock market price shows downward trend, the analysts begin to debate whether it is actually a correction, a rally, or the start of a bear market or even a bull market. In any case it is usually impossible to arrive at any correct decision. In fact, whether the market is actually passing through a correction or a truly bear phase can be determined only after that phase is over.

It must, however, be noted that a bear market howsoever depressing it may be, rarely wipes out the real (inflation adjusted) gains made during the previous bull market. On the other hand the bulls that succeed the bears often make up for the real losses of any bear market.


By Micheal James

How I Make Money From Stocks in a Falling Market

I have been making some great money from the stock market over the last few weeks. In this article i will explain my strategy and disect how and why I have been making money despite global indices falling as the full effect of the credit crisis sinks in to the financial world.

The media is absolutely full of doom and gloom about the worlds stock markets at the minute. Most of the major indexes like the Dow Jones or FTSE have fallen significantly over the last few weeks. Many people will tell you that it is the worst time to be owning stocks in years. This is not exactly true. What is not publicised by the media is that volatile markets such as these present very strong opportunities to make money from the markets. I will explain how below.

Many of the markets that focus on smaller companies (non banks) are not affected by the negative news coming out of the banking sector. As a result my penny stock investments have been unaffected by the current crisis. In fact they have been doing better than usual, I suspect as a result of many investment managers moving some of their portfolio funds from major indices to smaller cap firms and penny stocks in order to limit their losses.

My investment strategy is very simple. I am subscribed to a stock list that provides me the results of a detailed computer program/analysis tool. This gives me a massive head start to picking winning stocks as it saves me wasting the majority of my time investigating stocks that I end up not investing in. This subscription (which cost me under $100) dramatically improved my investment success alone.

Once I have the shortlist I simply hit Google and look at recent articles about the company in the press. Key signals I look for are recent announcements concerning new contracts signed, possible take over targets, anything really that indicates they are a company on the rise. Next i usually head to their website and compare it to their competitors sites. I ask myself the simple question "if i was a possible customer, would I choose them or their competitors?". If I choose them I will go ahead and invest once the stock reaches the target price in the list I received as mentioned above.

The great thing about this strategy is I no longer get bogged down in all of the details and numerical analysis I used to spend days and days performing.


By James McKerr