5 important factors that can fall the stock price

5 important factors that can fall the stock price

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

Whether a Warren Buffett or Peter Lynch, every brilliant investor suggests to earn a maximum return, invest in the undervalued company.
Generally, a good company is overvalued but an intelligent investor searches a company which is available at the discounted prices.
Valuation is nothing but to find the intrinsic value of a company.
As a rule, if the intrinsic value of a company is lower than its current price, the company is undervalued else it is overvalued.
The intrinsic value of the company is easy to find by various methods such as discounted cash flow, PEG, Earning yield,etc.

5. High debt

     The debt is not a bad thing for the company. In fact, the company establish or expand their businesses with the help of the debt.
For example. The company is expecting the return of the 20% on the investment but the interest rate is 10% then the debt is good for the company growth.
The things are going wrong when their return becomes low, but the debt interest rate is high, as a result, it only leads the increase in debt.
Moreover, it is the nature of some businesses they depend on the high debt and perform well.

How to check the company’s debt position? 

All things considered, the company with high debt is the poor option to invest except a few with the business nature.
The two ratios that can help to analyse the company’s debt position are:-
  • 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

Despite the company situation, there are the economic factors that lead to the fall in stock prices.
The few of the economic factors are :
  •  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.

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