Understanding the NYSE Stock Fluctuations

Fear and Greed

In order to understand why prices rise and fall on the NYSE, you need to understand a little about investor psychology. Investors tend to act in unison, similar to the way a school of fish follow one another. Investor sentiment ranges between fear and greed. When prices begin to fall, investors sell in panic, oftentimes overreacting. Likewise, when prices are rising, investors buy, oftentimes becoming enthusiastic, which can cause price levels to rise well beyond reasonable values. When prices reach extremes in either direction, markets usually correct by falling back or rising up to more reasonable price valuations.

Free market economies are prone to endure boom and bust price cycles. During recessions, stock prices fall as company earnings fall. During times of economic growth, earnings grow and stock prices rise. Some stocks are more prone to rise and fall in response to economic cycles than others. Construction, investment firms and hotels are among those types of companies that rise and fall in response to the economy. Meanwhile, consumer staples, such as food producers, are less vulnerable since demand for food stays relatively constant regardless of how well the economy is doing.

Prices in the stock market are thought to reflect all available information at any given time. As new information is made available, prices rise and fall in response as the market attempts to fairly value stocks. Information that the markets process includes company earnings, government interest rate hikes and cuts, economic reports and a long list of other factors.

Speculation activity can also cause prices to rise and fall. Stock traders attempt to profit from market volatility, buying low and selling high. Trading activity creates supply and demand in the market. For example, traders who buy low under the impression the price is ready to reverse, can sometimes create a self-fulfilled prophesy as they bid prices higher. The same is true when traders sell.