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Why Does the Stock Market Price Rise and Fall?

The question about what moves the tock market is quite complicated. There are several visible and invisible factors that cause the rise and fall in stock market. There are several issues on political, economic and social level that include inflation, change in interest rates, earnings of the people, oil and energy prices, war, peace and terrorism, political and domestic situation and so on. While some of these factors may have long-term consequences for the stock market, others may have only short-term implications.

What, however, drives the market crazy is the uncertainty factor. What the stock market is most sensitive to is the surprises. When something unusual occurs in the country, the stock market immediately reacts to it. Stock market radars are extremely sensitive to changes.

This can be illustrated by an example. If the Federal Reserve Board’s Open Market Committee-Fed- thinks of raising the interest rates by one quarter percent, the stock market will not react much. If contrary to the expectation, the Fed raises the interest rate by one-half percent, the market will feel shocked.

So any news which can surprise the market can rattle it, be it on the economic front, terrorist attack and similar other incident. If the news is really good, it also shows its impact in form of rise in stock prices.

The cumulative effect of these factors, whether good or bad, creates market phases such as bulls phase, bears’ phase or secular phase.

A bull market is also referred to as a bull run. A bull market is characterized by a rise in stock prices. It keeps most investors happy. It creates and strengthens their confidence and makes them optimistic about the returns on their investments. Therefore they tend to invest in stocks in the hope of making big in the near future.

A notable example of bull market was in the 1990s when the US and several international markets had a very happy time because the financial markets went up very rapidly. The US stock markets had a bull run from 1983 to 2007 except for brief periods of slumps.

Bear market is associated with fall in prices and lots of pessimism. Investors fear losses. A negative sentiment prevails in the market and investors want to sell their stocks fearing further downfall.

The most glaring example of bear phase in the history of United States was after the Wall Street Crash of 1929 that continued from 1930 to 1932 generating what was called the Great Depression. A milder version of bear market occurred from about 1973 to 1982 when the economy became stagnant. It resulted in energy crisis and high unemployment in the early 1980s.

A bear market is often characterized by the constant price fluctuations. A bear market does not mean just a simple fall in stock prices. It may result in substantial price fall. Although you cannot give a clear definition of bear market, it is often characterized by a fall in price by around 20% in a period of two months. A recent example of bear market is current state stock markets of world in the year 2008.

A bear market should not be confused with a period of correction. Correction also results in fall in stock markets, but a period of correction is usually short lived. Moreover correction usually occurs during the bull phase. The price fall does not surpass 15-20%. The bear markets last longer and suffer much greater price falls from top to bottom.

A period of correction in stock prices is usually a welcome opportunity for smart stock market investors. They try to buy high value stocks when most people try to sell them away at reduced prices. The profit from their sales as soon as the correction period, which is usually short lived, is over.

When the stock market price shows downward trend, the analysts begin to debate whether it is actually a correction, a rally, or the start of a bear market or even a bull market. In any case it is usually impossible to arrive at any correct decision. In fact, whether the market is actually passing through a correction or a truly bear phase can be determined only after that phase is over.

It must, however, be noted that a bear market howsoever depressing it may be, rarely wipes out the real (inflation adjusted) gains made during the previous bull market. On the other hand the bulls that succeed the bears often make up for the real losses of any bear market.

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