On any given day we can see the stock market move up and down. Of course, investors are banking on there being more up days than down days over the long-term. We are going to explore firstly, what we mean by up and down, before looking at some of the specific factors that can make the stock market move up and down.
What do we mean by up and down?
The easiest way to look at how the stock market is performing as a whole is to look at the indexes. A stock market index is essentially a category of stocks. They are designed to provide a reasonable representation of the market.
For example, to represent the UK stock market some of the indexes we have include the FTSE 100 and FTSE 250. The FTSE 100 index represents the largest companies by total market value. The FTSE 250 represents the 101st – 351st largest companies by total market value.
These indexes are represented by a points value. As the share prices of the companies within the index move up and down so does the points value. So, when we hear that the stock market is up or down on any given day it will usually be because the indexes have lost or gained points.
The use of stock market indexes gives us a helpful snapshot at any given time as to generally how the stock market is doing.
Let’s look at some of the factors that drive the stock market to move up and down.
1. The fundamental factor – supply and demand
Share prices are driven by supply and demand.
Let us explain. The clue is in the name. The stock market is a marketplace. There are buyers and there are sellers.
As more people want to buy a share it pushes the price up. This helps progressively reduce the demand. Imagine, during a snowstorm a supermarket has ten loafs of bread to sell but one thousand people want to buy one. Do you think they could charge more? If they did you would expect at least ten people to buy. However, you would also expect demand to progressively reduce as people judge the price to be too high for them.
A stock exchange (the London Stock Exchange in the UK) manages the prices of shares through their trading system. As more people buy a share, the price goes up. As more people sell a share, the price goes down. Then, when the number of people buying match the number is people selling the share price will stay the same.
This supply and demand drives the performance of the stock market as a whole. Where in total, more shares are being bought than sold then the market as a whole will move up. This is because the individual share prices will have risen. On the other hand, where more shares in total are being sold than bought the market will move down as the share prices of those being sold fall lower.
2. Politics & the stock market
You don’t need us told tell you that politics can be quite volatile. The thing is, investors generally do not like uncertainty. The more stable the political situation is, the more confident investors are likely to feel and this is usually reflected in how the stock market is doing.
Look at what happened after the Brexit referendum back in 2016. The result left a huge cloud of uncertainty over what was going to happen and British stocks took a beating in the days following the vote.
We also saw this kind of effect in the US where a mere tweet from Donald Trump during his presidency caused the stock market to move around as investors digested what he was saying. We saw this quite a lot in relation to the trade relationship with China. When something was put out that sounded like the two countries were getting on, we saw investors became more positive. With the reverse true when a tweet came out that made investors nervous that the two countries would continue their trade war.
Now, we saw this on a global scale at the start of the COVID-19 pandemic in 2020. As infections spiked and countries around the world began announcing lockdowns there was mass uncertainty about the immediate future. The share prices of the vast majority of companies tumbled downwards, at least in the short-term.
3. Economic data
Throughout the year we see various releases of economic data around the world. This could be anything from unemployment rates to interest rates to inflation figures. What happens is the economic data can act as an indicator (although it is fair to say the indicator can be wrong).
Let’s say that some data is released that shows the unemployment rate has fallen. This means more people are in jobs which could be seen as god for business. This may make investors feel more confident.
In another example, imagine that the latest consumer confidence index data gets released. This index is designed to represent the sentiment of consumers by looking at how much they are spending. A fall in this index may make some investors nervous that businesses will see a decline in sales.
As an everyday investor you may not want to get tangled up in analysing economic data like the professionals. However, it is important to pay attention to the news and be aware generally of what is going on. This may also help you work out why there has been a big drop or big gain in the market on any given day. You may also wish to consider diversifying your portfolio to limit your exposure to shocks in particular countries and sectors.
4. Company performance
Companies listed on the stock market are required to publish their financial results and trading updates. Companies will report data such as how much revenue they have generated and how much profit they have made. This helps investors to understand how well the company is performing and their outlook.
Positive announcements will make a share more attractive to investors whilst negative announcements will turn them off. Some shareholders may decide to take action and sell in the case of bad news or buy in the case of positive news.
There are a couple of ways that this can drive the stock market up and down. Firstly, lots of companies will often report their financial results around the same time of year. So, lots of negative news may see lots of different investors sell. This would drive the share prices of those companies lower and in-turn could see the market as a whole drop.
Secondly, good or bad news from a very large company can affect things too. The FTSE indexes deploy weightings so that the largest companies (by market cap) have the biggest impact on the value of the index. Let’s say one or more of the largest companies puts out positive news. This then drives investors to buy up the shares and pushes the share price higher. This could then drive the value of the index higher (assuming there are no dramatic movements with other companies in the index).
Sentiment moves the stock market up and down
The market is driven by investor sentiment. This is the general collective mood towards the stock market. When investors are feeling more positive about the future outlook, we see the market move up. When they are more pessimistic, we see it move down. The factors above provide some context as to what is actually driving this in practice.
If you’re keen to learn more make sure you check out the rest of our website or grab a copy of our free Beginner’s Guide to Investing in the Stock Market.
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