When trading, stocks move up and down for a wide variety of reasons. Much of it is plain old investor emotion. Some of it is the renowned "herd" mentality you've probably heard about on Wall Street, where the many follow the supposedly knowledgeable few.
Basically, it all comes down to corporate earnings - in other words, how well a company is doing at making money. If a company hemorrhages money over a short period of time, the stock trading price will probably decline. Conversely, if it is swimming in profits, the trading price of the company's stock will rise.
What can impact earnings? Lots of things - but only three primary ones you must know about:
- The Company Effect - Industry market share, performance of senior management, delays in getting products out, and poor customer service are just a few examples of internal company factors that can affect earnings, and thus impact the company's stock price. Take Apple Computers, for example. The company's stock price was languishing until founder Steve Jobs was brought out of retirement to restore some much-needed juice to the computer company. Jobs brought along an infusion of new ideas, like the popular iMac computer, that restored consumers' faith in the firm. As a result, company stock trading price rebounded upward (though not as high as when the company took off in the 1980s).
- The Industry Effect - In a global marketplace where information is a commodity, taking the industry lead is a big factor in the success of a company's stock. With global competition, improvements in technology, sawyer consumer perceptions, and the cost of running a company all impact earnings and stock prices of companies in a given industry. Look at the telecommunications industry. When it hit critical mass in 2000 or so - meaning just about everyone had a phone or Internet hookup - there were fewer new markets to crash and, consequently, fewer places to find new sources of earnings. The dearth of market opportunities pulverized the industry. By 2003, it still had not recovered.
- The Market Effect - Economic conditions, political influences like war and deficits, and geopolitical issues like currency fluctuations and debt all affect the consumer markets that companies are trying to reach. Consider the U.S. economy, which for months was virtually held hostage by the struggle over whether there would be a war between the United States and Iraq in early 2003. With consumers and businesses on pins and needles, people were buying less and investing less - at least, until the war ended and the market rebounded.
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