June 10, 2015

Why Stock Market Fall?

Philippine Stock Market Board
Photo By Katrina.Tuliao [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

There many reasons why a stock market fall, but the general reason is specifically related on the level of confidence that the investor has on stock and the macro-economy. In simple words, when the investor sees that the business that he has invested is doing well, which can be measured by financial statements; he will not sell the stock at a lower price. On the other side, when the macro-economy is performing bad, which can be measured using GDP, interest rate, inflation rate, business and political news, and the likes; the investor might perceived that this might affect the business that he had invested and thus might lower the stock price.

To summarize, there are two major reason why stock fall; this is due to micro and macro-economic change. Micro-economic side is related to financial performance of individual companies while macro-economic side is related to local and international economic performance of countries.

The main strategy on investing is to research the individual company performance and look at the economic climate. The investment decision must not only be based on the financial side, since there are risk involve when economic outlook is not good. Thus, the investor must wait, see, and evaluate before to invest in a particular stock. The investor must ask; is the stock overvalued? Will the stock market further drop? What is the psychology of the market? Is this the lowest price? Is this the best time to invest? Is the international and local economy doing fine? What is the financial performance of the company? What is the news that might affect the company stock price?

In addition, since all investment has risk, you must be able to set your risk tolerance. In other words, you must know the percentage at which you will sell the stock. For example, the stock price increased by 3%; would you sell the stock? If the stock fell by 3%; would you sell the stock? If you did sell at 3%, then your risk tolerance is 3%. You can adjust your risk tolerance depending on how you feel towards risk.

1 comment:

  1. Buying without thinking causes stock price to fall


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