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.

RELATED FAQS
  1. Why do stock prices change following news reports?

    Stock prices move up and down every minute due to fluctuations in supply and demand. If more people want to buy a particular ... Read Answer >>
  2. Why don't stocks begin trading at the previous day's closing price?

    Most stock exchanges work according to the forces of supply and demand, which determine the prices at which stocks are bought ... Read Answer >>
  3. How does the law of supply and demand affect the stock market?

    Find out how the law of supply and demand affects the stock market, and how it determines the prices of individual stocks ... Read Answer >>
  4. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  5. How Does the Law of Supply and Demand Affect Prices?

    Learn what the law of supply and demand is. Read Answer >>
  6. How does the law of supply and demand affect the housing market?

    Learn about the law of supply and demand, the relationship between supply and demand and how the law of supply and demand ... Read Answer >>
Related Articles
  1. Investing

    Where's The Market Headed Now?

    Whether up, down or sideways, learn about some of the factors that drive stock market moves.
  2. Investing

    Terrorism's Effects on Wall Street

    Terrorist activity tends to have a negative impact on the markets, but just how much? Find out how to take cover.
  3. Insights

    A History Of Wall Street Profitability

    Learn about the performance of the Dow Jones Industrial Averages (DJIA) through the decades.
  4. Financial Advisor

    Don't Hide From The Reality Of How Terrorism Affects The Economy

    After major terror attacks, most people don't want to think about economics. But the post-terror economy affects the lives of the whole world, so it's important to be knowledgeable.
  5. Insights

    4 Factors That Shape Market Trends

    Trends allow traders and investors to capture profits. Find out what's behind them.
  6. Insights

    What is Demand?

    Demand is the economic term for the cumulative wants and desires of consumers as they relate to a particular good or service. Generally speaking, if all other factors remain constant, as demand ...
  7. Investing

    Understanding And Playing The Dow Jones Industrial Average

    Learn strategies for investing in this price-weighted index and how to interpret its movements.
RELATED TERMS
  1. Law Of Supply And Demand

    A theory explaining the interaction between the supply of a resource ...
  2. Demand

    An economic principle that describes a consumer's desire and ...
  3. Supply

    A fundamental economic concept that describes the total amount ...
  4. Buyer's Market

    A situation in which supply exceeds demand, giving purchasers ...
  5. Dow Jones Industrial Average (DJIA) Yield

    The aggregate dividend yield on the 30 stocks that make up the ...
  6. Stock Market Crash Of 1987

    A rapid and severe downturn in stock prices that occurred in ...
Hot Definitions
  1. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  2. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  3. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  4. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  5. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  6. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
Trading Center