Why Stock Prices Fluctuate

Timing is everything in the stock market. While it is impossible to predict the future, understanding how stock prices change can improve your chances of making better investment decisions.

If the price of a stock in your portfolio has declined over time and you are looking to track where the money went, you might be disappointed to learn that you are tracking an illusion. When a stock price crashes, its value isn't redistributed, It merely shrinks. Stock prices may appear random, but there are repeating price cycles, which are primarily driven by market participation.

To illustrate this point further, if you have one share in a company and the share price has dropped from N150 to N80, you still have your one share. You have not lost any money except you decide to sell at a lower price. What has changed is what someone else is willing to pay for that share.

We will be illustrating further with the Dow Theory. The Dow Theory is about stock price movements that includes both technical analysis and sector rotation. The theory was created out of 255 Wall Street Journal editorials written by Charles H. Dow, who was the founder and first editor of the Wall Street Journal in the United states of America. 

According to the theory, stock prices follow three phases: the accumulation phase, the public participation phase and a panic phase. An understanding of the three market phases can help traders make sense of the way price moves and shed new light on how the bull and bear markets are created.

The first phase of a bull market is referred to as the accumulation phase, which is the start of the upward trend. At this stage, stock prices are at an all time low. This is also considered the point at which investors start to enter the market and accumulate as many shares as possible without causing much price rise. 

This stage will continue to build up until the public participation phase emerges and the stock becomes attractive to the public. During this phase, negative sentiments starts to disappear, positive economic news starts to saturate the market and, as a result, more and more investors move back into the market, sending prices higher.

Then comes the public participation phase which is the phase with the largest price movement. Investors who accumulated shares during the first phase start selling their holdings to those investors who were later attracted because of very high prices. Eventually, stock prices reach a level where no one is willing to buy them as they are too high, reversing the uptrend in prices. As more investors start losing money, more people start selling, and then the price of the stock crashes and investors start panicking. 

Timing is everything in the stock market. While it is impossible to predict the future, understanding how stock prices change improves your chances. That is why it is very important to develop a plan that will help you determine when to buy or sell shares. Here, we equip you with market news as well as stock picking strategies to help you make the best of your investment portfolio.