Stocks are the most volatile asset class in the financial markets. They gain and lose value erratically at times and can go from the biggest, high-flying investment to a penny stock seemingly overnight. Sometimes the factors that move the market value of stocks are predictable, but often they are not. Nonetheless, investors can observe certain events in anticipation of some stock movement, occurrences that may unfold internally at a business or externally in the broader markets or economy.
Developments that unfold internally at a company could certainly influence stock trading. Stocks can be extremely sensitive to financial news, such as whether profits or sales are measuring up to the investment community's expectations, in addition to the success or failure of new products. Even external conditions can influence stock prices, such as extreme weather that threatens a company's operations or its ability to earn profits as well as public policy that sets the regulatory tone for the way companies do business.
When a stock is trading low compared with its profit performance or potential, it is considered as having a low valuation. This is often measured by the market value of a stock in comparison to its previous or projected earnings, known as a price-to-earnings (P/E) ratio. A company with a low valuation could inspire buying in anticipation of a rising stock price, which will in fact drive the market value higher. A stock deemed expensive based on its P/E ratio could soon come under pressure as investors sell shares upon realizing the security is too richly priced.
Both fear and euphoria can be drivers of stock prices even among investors with the best strategies. Since the financial crisis of 2008, investors have been extremely skittish about returning money to the stock market. By 2011, investors were slowly beginning to return only to learn that signs of yet another recession were emerging. Investors once again fled the stock market in fear as losses amounted to $1 trillion, according to a 2011 article on the CNN Money website.
Economic conditions, including domestic and international circumstances, have the ability to impact stock prices often in an unpredictable manner. When an economy is growing at a frenetic pace, stock prices could very well fall as investors fear that a coming inflation will damage profit prospects for corporations. Unstable economies also pressure stock prices, but when investors sense some kind of relief, such as a type of monetary stimulus that is designed to urge economic activity, their confidence in the markets could improve thereby sending stock prices higher.
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- Stock quotes image by Chad McDermott from Fotolia.com