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#74 - Stock Market Behavior 101

Updated: Mar 5, 2022

How do financial traders and investment firms predict which stocks will perform well? How do they know when to buy and sell?

Unfortunately, there’s no simple way to predict the behavior of the stock market. A number of factors cause rises and falls in share prices through gradual changes or sharp spikes.

The best way to understand how the stock market fluctuates is to study trends of individual stocks and broad market behaviors.

How to Understand the Stock Market’s Behavior

-Bullish or Bearish

-Outside influences

-Economic recovery - money supply, economic programs, moratorium on rent and student loans, stimulus checks, unemployment

-The Fed: buying treasuries to increase the money supply in the economy by swapping out bonds in exchange for cash to the general public.

-Inflation rate: they set the interest rate increase / decrease. So are they hawkish (bad) or dovish (good)?

-Oil Prices: Historically, the stock market has reacted negatively to higher oil prices.

-General sentiment for all factors; how do people feel?

Understanding Stocks

Some factors can have a big effect on individual stocks. In the large scheme of things, these factors may not shake the market at large but may have a deep impact on a particular sector or a particular company.

Here are some of those factors:

Corporate Actions

Consider the company offering the stock in question. What’s their story? What’s going on in their company right now? Changes in the corporate structure, business model, or operations can have a big effect on individual stocks:

Public Opinion vs. Stock Price

If the public opinion in a company is generally high, the stock price tends to go higher. This could be due to good news, a great new product, a big new partnership, or other factors.

On the flipside, if a company goes down in public opinion, the stock price tends to go down, too. This could be because the company is involved in a scandal, the industry is experiencing a downturn or becoming obsolete, a contract key to their business was not renewed, and so on.

For example, say Company X’s CEO is terminated. If him/her was performing well, the public's perception could turn negative may affect the stock price.

On the inverse, CEO was a poor performer the replacement employee could increase public opinion and increase demand for the stock.

Traders Emotions Vs. Stock Price

Company news can have a profound impact on traders’ psychology.

Companies are constantly evolving; they buy other companies, they merge with other companies, reorganize or modify corporate product strategy.

If a company’s changes inspire positive sentiments it can drive the stock price up as many people trade on the future; not necessarily on the present state.

If a company direction creates fear or uncertainty the stock price will probably go down.

Influence of a Quarterly Earnings Report

A company’s earnings report is a report card of sorts to see the recent quarter's results and the forward looking outlook. They may also effect the entire sector that it is related to.

The goal is to compare the earnings to its recent quarter or two. Typically when the profits are higher this quarter than prior quarter, this is seen as an indication that the company is meeting or exceeding expectations.

This often leads to the stock going up unless traders feel that the news or results are not powerful enough to entice more buyers than sellers. In addition, some people simply want to sell a stock to lock-in profits.

A decrease in revenue and earnings per share versus even the most recent quarter can lead to a stock sell off.

There are several factors that influence the prices of the stock market and individual companies. We have highlighted many points; however, the best thing that you can do is pay attention and do your homework to be an informed investor.

Episode Link:

Stock Market Behavior 101

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