The stock market is one of the most stable markets. It continues to grow throughout the year and at times even through the worst recession periods. The amount of information that is accessible on the Internet is simply staggering.
However, one very important aspect of the stock market that people do not always take into account is the fact that there are no guarantees that the stock market will continue to be strong. There will be times when it appears to have fallen to its lowest point, which is why it is vital to understand exactly what will cause a stock market decline.
What Causes the Stock Market to Decline?
Once a stock market drop has occurred, there are certain factors that can trigger it. Here are some of the more common ones:
Decreasing stock market equity values: When shares in a company drop it can indicate that shareholders are less willing to part with their money to maintain the status quo. This means that they are not as confident in the company’s ability to succeed. A stock market decline typically occurs when share prices fall by more than 10% for a period of at least four days.
Economic news: If any economic data suggests that the economy is slowing down, the stock market may be dropping as a result. Statistics are one of the most reliable ways to gauge the health of a particular industry. If any bad news is coming out of the company’s quarter, for example, investors are likely to think that things could get worse before they get better.
Bad weather: Unfortunately, sometimes bad weather can cause a decline in the stock market. In the last decade, Hurricane Katrina and the ensuing devastation that it caused in New Orleans caused many businesses to close or cut back on their operations. As a result, many large companies were unable to come up with a plan to provide support to the local communities.
Change in government: Sometimes governments can put laws in place that hamper the growth of certain industries. These include laws relating to the environment, like cap-and-trade programs. Such laws, however, usually occur only when certain industries reach a certain scale. Usually, the government only meddles in industries when the consumers are directly affected.
Other times, governments simply legislate in order to change the way that consumers perceive certain products.
When this happens, the consumer spending power can be severely affected.
Political instability: Governments can sometimes cause political instability in order to stop citizens from voting against them. When this happens, the economy can be negatively affected. This is also commonly seen in countries with unstable governments.
Bad news: Sometimes bad news can also cause a stock market decline. Rumors about a company, an acquisition, or even the overall performance of the economy can all influence the stock market.
Good news: Just as with rumors, if something good happens to a company, the stock market can rise. Once something good happens to a company, consumers will begin to trust that the company will continue to operate in the future.
Like all other events, a stock market decline can happen at any time. However, there are a few things that should be kept in mind in order to avoid making an important investment decision based on inaccurate information.