question no.57

question-why does stock goes down in price when there is a big sell off?

• INTRODUCTION-

The stock market can be compared to a massive auction, wherein ownership of large companies is for sale. The investors involved have varied points of view. While some investors may gauge a particular company as viable investment and are willing to bid the price up; there are others who wish to sell off. Such constant variations lead to the fluctuations in stock prices. Stocks go up when more people want to buy than sell. When this happens, investors begin to bid higher prices than the stock has been currently trading. On the other side, stocks go down because more people want to sell than buy. In order to quickly sell their shares, people are willing to accept a lower price.

• DISCUSSION

The number of shares sold of a particular stock on a given day has to equal the number of shares purchased of that stock on that day. On the stock market, this is referred to as the "volume". Under certain circumstances, the stocks at a given point of time become unattractive to both the new buyer and to the existing owner. The reasons for a company losing its charm could be many. Stocks could go down due to slipping of profits, resignation of top executives, a good investor selling off a big chunk of shares, losing a valuable customer, a factory burn down, similar stocks going down in the market, an analyst downgrading the stocks, launching of a better product, shortage of product supply, scientists rating the product as unsafe, a law suit filed against the company, lack of popularity of the company and even rumors misguiding investors in general.

Due to any of the reasons mentioned, the stock of a company could suffer in value. As a result, shares in that company at the current price are now less attractive to both, the current company shareholders and those considering purchasing shares of the company in question. In such eventuality, those interested in buying the stock will tend to demand a lower price to accept the company's shares. This means that the bidding price of the stock gets lowered. On the other hand, those interested in selling the shares of the same company will offer a lower price to lure people and get rid of the shares. This obviously lowers the asking price of the companies stock. Eventually a buyer and seller will agree on a price, which equates the 'bid' and the 'ask' and the shares will be sold. This price will naturally be lower than the price at which the shares were previously selling and therefore, the stocks go down in price despite a big sell off.

The relationship between the number of goods sold and the number of goods bought holds good in any market, not just the stock market. The rates in a stock market go up and down similar to the action of a bouncing ball. Some investors are tuned to these fluctuations in the stock market but it can be extremely frustrating for many investors who desire a steady rise. However, despite the volatility in the market as a whole and in the individual stocks, an experienced trader will make profit. In the absence of experience, the individual investor needs a proven source of information and direction.

• CONCLUSION
  

Therefore,it is advisable to closely look into the companies financial statements and assess its worth before making the investment. One can also study the stocks' past performance, which would surely indicate the trends in future. In fact such fluctuations have made many investors into traders, who buy and sell on the fluctuations of the market and the individual stocks. These traders make money in any market - up or down!

• SUBMITTED TO-

Mr. Gurdeepak singh

• SUBMITTED BY-

Gurdeep kaur virdi
MBA(A) 1st semester