Stock prices are influenced by supply and demand dynamics, similar to how prices in other markets fluctuate based on consumer interest.
When more people want to buy a stock than sell it, prices go up.
The Efficient Market Hypothesis suggests that stock prices reflect all available information.
According to this theory, it's impossible to consistently achieve higher returns than the average market return on a risk-adjusted basis.
Earnings reports, which detail a company's financial performance, can lead to significant price movements.
A company that exceeds earnings expectations often sees its stock price rise, while disappointing results can lead to declines.
Technical analysis, used by many traders, involves studying historical price patterns and trading volumes to predict future movements.
This approach is akin to weather forecasting based on historical climate data.
The "January Effect" is a phenomenon where stocks, particularly small-cap stocks, tend to rise in January.
This can be attributed to increased buying after year-end tax selling, which often depresses prices in December.
Insider trading laws prohibit executives from trading their company's stock based on non-public material information.
However, many insiders do participate in stock buybacks, which can send positive signals to the market.
Short selling is a strategy where investors bet against a stock, selling it with the intention of buying it back at a lower price.
This can lead to a "short squeeze," where stock prices rapidly increase as short sellers buy back shares to cover their positions.
Stock market indices like the S&P 500 aggregate different companies' performance to provide a snapshot of the market.
These indices are weighted, meaning larger companies have a more significant impact on the index's performance.
Economic indicators, such as unemployment rates and GDP growth, impact stock prices.
For instance, lower unemployment usually indicates a healthy economy, leading to higher consumer spending and potentially boosting stock prices.
Market sentiment can be swayed by news, both positive and negative.
Events like geopolitical tensions or natural disasters can lead to swift market reactions, demonstrating how external factors influence stock valuations.
Algorithms and automated trading systems now execute a significant portion of trades on the stock market.
These systems analyze market data at speeds and efficiencies beyond human capability, greatly affecting price movements.
Behavioral finance explores how psychology affects investor behavior.
Emotions such as fear and greed can lead to irrational decision-making, causing market bubbles or crashes, similar to how herd behavior can influence animal migrations.
The concept of "dividend yield" can attract investors looking for income.
A higher yield can signal a safer investment, but it may also indicate a declining stock price if the dividend remains unchanged while the share price drops.
Global events, such as pandemics or trade agreements, can have ripple effects on stock prices across different markets.
For example, disruptions in supply chains can hurt companies reliant on overseas production.
The "P/E ratio," or price-to-earnings ratio, is a common metric used to evaluate stock value.
A high P/E indicates that investors expect future growth, while a low P/E might suggest the stock is undervalued or the company is in decline.
Sector rotation is a strategy where investors shift their focus among various sectors of the economy based on economic cycles.
For instance, technology stocks may outperform during growth phases, while utilities might be favored in downturns.
The phenomenon of "window dressing" occurs when fund managers sell off poorly performing stocks at the end of a quarter to improve the appearance of their portfolios, potentially affecting stock prices temporarily.
Federal Reserve policies, such as interest rate changes, directly impact stock market performance.
Lower interest rates often stimulate borrowing and spending, which can drive stock prices higher.
The "momentum effect" suggests that stocks that have performed well in the past will continue to do so in the short term.
This behavior aligns with the idea that trends can persist due to investor psychology.
Quantitative easing, a monetary policy where central banks increase the money supply to stimulate the economy, can lead to higher stock prices as investors seek returns in equities when bond yields are low.