A:

There is a nearly infinite number of factors that can cause the stock market to move significantly in one direction or another, including economic data, geopolitical events and market sentiment. 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.

Simply put, supply is the number of shares people want to sell and demand is the number of shares 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 an individual company is trading up 15% on positive earnings. The reason for the increase in share price is 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 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 losses the index has ever suffered. The large market move was a reaction to the terrorist attacks against the U.S. 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, and stock prices plummeted in response to the marked decrease in demand.

(For related reading, see: Market Problems? Blame Investors.)

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