Why Do Stock Prices Fall?

Written by kofi bofah
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Why Do Stock Prices Fall?
Identify and manage stock market risks to create wealth. (dollar bill image by jimcox40 from Fotolia.com)

Investors explore stock market investments to establish financial security. Stocks, however, do expose you to risk, and you could lose some or all of your money. Familiarise yourself with corporate finance basics prior to devising your financial plan.

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Identification

Corporations sell shares of stock to investors to finance operations. In exchange, investors receive equity stakes in the business. Stock prices often fluctuate according to a business's earning power.

Causes

Stock prices fall when business profits decline. Business profits decline due to weak product lines, poor management decisions and increased competition. Stocks also fall in response to financial reports that fail to meet investor expectations.

Effects

Stock prices have a negative correlation to interest rates. Higher interest rates cause share prices to fall. At that point, more capital flows into fixed-income investments that offer higher returns for less risk. The lower demand for stocks translates into falling share prices.

Warning

Stocks are subject to systematic risks or global financial collapse. These events are characterised by investor panic and credit crises, where banks refuse to make loans. Stocks then crash and lose significant value.

Strategy

A diversified portfolio of stocks and bonds helps to manage risks, while allowing for growth. In a recession, bonds should continue making interest payments and holding value.

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