Table of Contents
The stock market can go up or down based on a number of different factors, including consumer confidence, worries about inflation, and supply and demand. As an investor, it’s important to understand market fluctuation and how it works, and to know how much fluctuation is normal.
Why do stocks fluctuate? Read on to learn more about market volatility and stock fluctuation.
Key Points
• Stock market fluctuations are generally driven by supply and demand, inflation, economic indicators, and company performance.
• Annual stock market fluctuations are common, and vary year to year.
• Market volatility may present opportunities to buy stocks at lower prices, but its possible prices could continue to decline.
• Diversifying assets may help reduce risk during volatile market conditions.
• Historical data shows 12 S&P 500 drops over 20% since World War II.
Top Causes of Stock Market Fluctuations
The stock market fluctuation definition is when stock prices rise or fall. So what causes this? The stock market can move up and down due to a variety of factors, including:
Supply and Demand
The prices of stocks depend on supply and demand. Supply is how much of a good — in this case, a share of stock — is available for sale. Demand is how much consumers want to buy that stock. Prices rise when the supply of shares of stock for sale is not enough to meet investors’ demands. When investors demand for shares falls, so does the price of the shares.
Overall, the stock market fluctuates because investors are buying and selling stocks in such a way, and in such volume, that stock prices make a large move in one direction or another.
Inflation
Concerns about inflation may cause investors to become bearish and stop buying stocks, which may make the market go down. That’s because during periods of inflation, consumer spending tends to slow, and corporate profits may suffer. Inflation can inject uncertainty and volatility into the market.
Economic Indicators
Economic indicators are data that analysts use to help judge the health of the economy. These indicators can, in turn, affect stock market fluctuation. They typically include such things as the Consumer Price Index, unemployment numbers, interest rates, and home sales. If prices, interest rates, and unemployment rise, chances are good that there may be stock fluctuation.
Company Performance
How well a company is doing can affect the price of its stock and potentially cause market fluctuations. If the company is expanding its operations and reporting a profit, for instance, investors’ demand for the stock may rise, along with the price of the stock. Conversely, if there are concerns about the company’s financial health, or it reports a loss, demand for the stock may drop, and so generally will the price.
Pros and Cons of Market Fluctuations
There are benefits and drawbacks to market fluctuations, and that may be particularly true for short-term traders to use volatility as an opportunity to generate returns. These are some of the advantages and disadvantages to consider when the market becomes volatile.
|
Market Fluctuations |
|
|---|---|
| Pros | Cons |
| May be able to purchase stocks at lower prices | Could lose money by selling stocks at a loss |
| Opportunity to diversify assets | Holdings could lose value |
Pros of Market Fluctuations
Market fluctuations may be a good thing for some investors, in some instances.
• Chance to purchase shares at lower prices. When stock prices go down, it may be a good opportunity for investors to buy shares for less. Investing in a down market could be beneficial.
• Incentive to diversify your assets. When the market is volatile, it’s a prime time to look over your asset allocation and make any prudent changes. For instance, you may want to reduce some of your holdings in riskier assets and move them over to safer investments in case the market drops.
Cons of Market Fluctuations
Market fluctuations also have downsides including a potentially higher risk of seeing losses.
• Might end up selling stocks at a loss. Instead of panicking, selling your shares, and losing money, you may be better off waiting out the fluctuations if you can. When the market goes back up, you may be able to recoup what you paid for the stock.
• Holdings could lose value. Naturally, market fluctuations and volatility often mean that holdings lose value, and that may not be something that all investors can stomach.
Volatility Means the Stock Market Is Working
Although it’s difficult to watch the value of your portfolio drop, stock market volatility is a normal part of stock market investing. In fact, volatility is natural, and it shows that the stock market is working as it should.
Here’s why: The more investors weigh in — by actively buying and selling stocks — the more accurate the prices of stocks will ultimately be. Essentially, it’s a weighing of information about the “correct” price of a stock from many different investors.
It’s also helpful to remember that volatility doesn’t just relate to rising stock prices — it also refers to falling stock prices. When the stock market makes a surge upward, that is also considered stock market fluctuation.
What Is a Normal Amount of Stock Market Fluctuation?
Almost any amount of market fluctuation is possible.
The best guide for understanding what is normal (and what is not) is to look at what has happened in the past. While past performance is never a guarantee of future financial success, it’s helpful to look at the data.
The most commonly cited pool of data is the S&P 500. The S&P 500 can give a good historical gauge of stock market movement.
Since World War II — the “modern” stock market era, the S&P 500 has seen a dozen or so drops in the stock market of over 20%.
| Peak (Start) | Return |
|---|---|
| May 29, 1946 | -30% |
| August 2, 1956 | -22% |
| December 12, 1961 | -28% |
| February 9, 1966 | -22% |
| November 29, 1968 | -36% |
| January 11, 1973 | -48% |
| November 28, 1980 | -27% |
| August 25, 1987 | -34% |
| July 16, 1990 | -20% |
| March 27, 2000 | -49% |
| October 9, 2007 | -57% |
| February 19, 2020 | 33.93% |
| December 31, 2021 | -28.5% |
Source: Morningstar
You’ll notice that a big drop in the stock market happens somewhat regularly. And smaller fluctuations of 5% or 10% down happen much more frequently than that.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
What Does Stock Market Volatility Mean to You As an Investor?
How you deal with volatility as an investor depends on your tolerance for risk. What to know about risk is that if you can’t afford losses, volatility could be a time of fear and uncertainty for you. But if you have a higher tolerance for risk, you may see volatility as a potential opportunity.
Risk Tolerance in Investing
Risk tolerance is the amount of risk you’re willing to take with investments. Volatility in the market could directly affect your risk tolerance. For instance, if you have a higher risk tolerance, you may be willing to risk money for the possibility of high returns. If you have a lower risk tolerance, you’ll likely be looking for safer investments with more of a guaranteed return.
Your age, your financial goals, and the amount of money you have impact your risk tolerance. If you’re saving for retirement, and nearing retirement age, your risk tolerance will be lower. In this case, you’ll want to practice risk management with safer investments. If you’re in your 20s or 30s, however, you may have higher risk tolerance because you have more years to recoup any money you may lose.
The Takeaway
Choosing the right investment strategy depends on your goals, risk tolerance, and your personal situation. Every investor needs to manage their portfolio in a way that fits their needs during periods of market volatility and as well during times of stability.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
FAQ
Why does the stock market fluctuate?
The stock market fluctuates for a number of different reasons, but the biggest overall factor is supply and demand. Prices of stocks rise when the supply of shares for sale is not enough to meet investors’ demands. When investors’ demand for shares falls, so does the price of the shares. This causes volatility.
What is the average market fluctuation?
Markets fluctuate fairly frequently. While the market, on average, returns around 10% annually, that can and does fluctuate year to year.
How long do market fluctuations last?
How long market fluctuations last depends on the reason for the fluctuations and how big the fluctuations are. Remember, it’s normal to have some periods of volatility in the stock market. Diversifying your portfolio may help you manage risk and stay on track with your investment goals during times of uncertainty.
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