Why the stock price is rising and falling?
Generally, it is a complaint of every new investor that when they buy the stock, the stock price falls down, but when they sell the stock, the stock price rises.
As a result, it gives the impression to the new investor that they faced the loss because of their bad luck or market becomes partial to them? But it is not true, neither it is the role of bad luck nor the market partial to them.
In fact, the market doesn’t know who lost and who is making a profit, they simply do their routine job.
Above all, the market rewards to those who prepared well and do their homework before entering the market and punishing to those who only enter without preparation.
5 common factors that lead to the fall of the stock price?
It is essential to understand the common factors responsible in the rise of the company share price, but the common factors for the fall of the market complement to take the right decision whether to adhere to the stock or not.
The 5 common factors that lead to the fall of the stock price are:-
- A slowdown in earnings or revenue growth of a company
- Disturbing cash flow
- Change in Management vision
- Overvaluation
- High debt
1. A slowdown in revenue growth of a company
Revenue growth is the primary aim of any company to grow in a competitive market.
If the company’s earning is increasing year on year, then it gives the confidence that the company is doing well because of its competitive product line and capable management.
But what if the company revenue is falling year on year?
It is because the company’s product features are not aligned with the market demand or the management is not capable to beat the competition.
Thus, the fall in revenue growth is a clear indicator that the company is facing big trouble and it is better to avoid such company shares to invest.
2. Disturbing cash flows
The proper cash flow i.e. incoming or outgoing of the cash is the prime responsibility of the management.
The disturbing cash flow only leads an outstanding from customer and pending payments of vendor
Ultimately, the disturbing cash flow will lead to a disaster for the future growth of the company.
Thus, the excess cash or limited funds both are bad for the company and the warning sign for an investor that the management is not capable enough to handle the cash flows.
3. Change in Management Vision
Management plays an important role to take the company to the right or wrong direction.
Overall, the companies grow because their management’s vision is clear and they act towards the desired goals.
whereas if the management’s vision is unclear and changing again and again, then it will only give a poor result.
Thus, the frequent change in company vision leads to product instability, inefficient business operations.
4. Overvaluation
5. High debt
How to check the company’s debt position?
- Debt to equity ratio
- Interest coverage ratio
1. Debt to Equity ratio
It is the ratio of a shareholder’s equity and debt used to finance the company expansion, operations, etc.
2. Interest Coverage Ratio
It is a measure of a company’s ability to afford its interest payments and determines the company’s growth if their earning is using less in paying debt interest
Economic factors are also responsible for the fall of stock price
- Pandemic situations such as COVID-19
- Trade wars between the two nations. For e.g. US-China trade war.
- Global economy slows down. For e.g. Lehman brother crisis.
The unfavourable economic factors result in bad sentiments and lead to falling of the market that deteriorates heavily the investor funds.
Case Study
Lehman Brothers Crisis
During the Lehman Brothers crisis in the year 2008, Nifty lost around 50% of the value and ends with 3000 levels, but after 10 years of the crisis, Nifty reach 12000 levels.
Lehman crisis results in the blood in the market and deteriorates the funds of the investors.
COVID-19
A pandemic disease called COVID-19 is another major reason for the market bleeding in the year 2020.
Due to the impact of COVID-19, the Nifty falls of around 2800 points.
Fortunately, the market sentiments improve and at the end of the year, the Nifty rises to an all-time high.
Conclusion
Patience and persistence are the two important qualities that help an investor to stay in the market and handle the pressure of the market.
In brief, if an investor can stick to the market then he can learn to earn in the market because if he avoids learning then it results in the loss of money.
Thus, an investor who enhances their knowledge and stays in the market can be rewarded with the high returns from the market.