What causes a significant move in the stock market?

By Chad Langager AAA
A:

There is a nearly infinite number of factors that can cause the stock market to move significantly in one direction or another. This can include such things as economic data, geopolitical events and market sentiment, among a myriad of other factors. There is a constant in each of these situations, however. In any stock market move, whether up or down, there is a significant difference between supply and demand. (For more on this, see our Economics Basics tutorial.)

Simply put, supply is the shares that people want to sell and demand is the shares that people are looking to buy. When there is a difference between these two groups, the prices in the market move; the greater the disparity between demand and supply, the more significant the move will be. For example, suppose that an individual company is trading up 15% on positive earnings. The reason for the increase in share price is that more people are looking to buy this stock than sell it. This difference between the supply and demand causes share price to rise until an equilibrium is reached. Remember that in this case, more people are looking to buy shares than sell them; as a result, buyers need to bid the price of the shares higher in order to entice the sellers to part with them. This same scenario occurs when the overall market moves: there are more buyers/sellers of companies in the stock market than sellers/buyers, sending the price of companies up/down along with the overall market. After all, the stock market itself is just a collection of individual companies.

On September 17, 2001, the Dow Jones Industrial Average (DJIA) traded down 7.1%, which was one of the largest one-day percent losses the index has ever suffered. The large market move was a reaction to the terrorist attacks against the U.S. that had occurred nearly one week earlier. The DJIA traded down because of increased uncertainty about the future, including the possibility of more terrorist attacks, or even a war. This uncertainty caused more people to get out of the stock market than into it; stock prices plummeted in response to the marked decrease in demand.

For more information, read The Greatest Market Crashes and How Investors Often Cause The Market's Problems.

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