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I sat at my computer to check the performance of my taxable investment account over the past 2.5 years. I asked myself, “What drives stock prices to rise and fall at any given time?”

In my little experience with investing, I learned that if you don’t have a deeper understanding of how it works and know how to regulate your emotions, the stock market can be a very daunting place to invest your hard-earned money. I chose to look a little farther. I’ve noticed that everything that happens around the globe has an effect on the stock market.

What are stocks?

A share of ownership in a corporation is represented by a stock.

By owning shares of a company, you are a part owner. You have the same voting rights regarding who can serve on the board of directors as the shareholder who owns 10% of the total shares. The only difference is that your influence will be lessened.

How can you profit from stocks?

There are many ways to profit from stocks, but I’ll be focusing on these two common ones:

Buy and Hold

Purchasing outstanding firms and holding them is a classic strategy for making money with stocks. This is referred to as the buy-and-hold strategy.

Demand will increase as long as there is greater interest in the stock, which will eventually lead to an increase in price.

In the past 30 years, the stock market has historically returned an excess of 9.9% (or 7.3% when adjusted for inflation).

On the other hand, trading is the act of buying and selling with very little lead time. I’ve researched a lot of successful investors, and they all concur that traders typically lose more money over the long term.

Dividends

Dividends are payments made by corporations out of the profits they get from just purchasing and keeping their shares. The amount of dividends varies by company. Some businesses pay every month, every quarter, or two times a year.

These dividends can be compounded and reinvested to increase your wealth. Check out my dividend income to see the magic of compounding in action.

Why do stock prices go up and down?

With a better grasp of what a stock is and how to make money, let’s look at why stock prices fluctuate.

Supply & Demand

The demand for a stock and the number of sellers competing for it at any given time determine the price of the stock (the supply).

More bidders are drawn to a stock as interest in it grows more intense. Additionally, existing shareholders are less inclined to sell their own stock. The stock price rises as a result, because buyers are forced to offer more money for it.

This also functions in reverse. Fewer competing bids are made when interest in a stock falls. Shareholders are more eager to sell their shares, so the winning bid price must be lower.

News

News comes from both traditional and social media. Factors include earnings day, geopolitical issues, governmental policies, and internal problems.

As breaking news is reported, the stock market reacts immediately. Depending on the news, it can go up or down. Who knows?! One thing I know is that lots of shareholders will sell their stock.

Interest Rates

When the federal government raises interest rates, banks and other financial organizations lend money to one another at a faster rate. Investors won’t wait until it has a significant impact. They’ll take action as soon as it’s announced.

Consequently, the stock market is immediately impacted.

As a result, mortgage loan rates, credit card interest rates, and other loan-related costs will increase as a result. People and companies are less willing to borrow under these circumstances.

So, in order for corporations to stay afloat, they pass these expenses forward to customers by raising prices. Which is a different issue if customers are spending less. This is what’s known as inflation.

Simply put, your money is worth less every day.

Impact of Emotions

Regardless of what you may believe, we are all emotional beings. Each of us responds differently to certain events. This might result in a number of misunderstandings, such as believing that because investments are being touted, one should expect to make a fortune from them. 

Fear

Panic can make you sell investments too soon or decide not to invest when the opportunity presents itself. The stock market has repeatedly shown that after a market fall, people become wealthy.

Impatient

Investors who lack patience often sell their stocks as soon as they see a downward trend. If they could hold on just a little bit longer, they could sell it for a profit as opposed to suffering a loss–jeopardizing the possibility of stock recovery.

Photo by: Alex Green

Regrets

When you were given the chance to purchase stock at a discount but chose not to. Just due to it, you can decide to change your investing approach and start purchasing the stock at an exorbitant price.

Greed

Joining an investment noise-crowd may be attractive when greed takes over and you worry about missing out on investment growth. What you need to understand is that when investors are greedy, they tend to buy more stock, which causes stock prices to grow consistently while ignoring all the fundamentals.

As an example, consider Peloton Interactive [$PTON]. That business debuted in the first quarter of 2020. just before the government made the pandemic announcement.

The amount of media attention and marketing efforts made it seem like the at-home-exercise bike would be the next big thing, but convincing the public and making sales was a real challenge.

Let’s say you would have spent $93.50 if you had purchased the shares one year from now. 

Today, the stock fell 92.48 percent to $7.03.

How to Profit from a Volatile Market

Even during a recession, there are ways to profit from price changes without trying to time the market, which is dangerous and can result in losses for those who do.

Dollar-cost averaging

Examine each stock in your portfolio more thoroughly; if you intend to own it for the long term, buying the same stock at a discount is a great deal. Even better, it would be a major plus if you could throw in some more cash.

You will therefore be in much better shape whenever the stock market rebounds.

Keep diversifying

Maintaining asset diversification is a key component of a winning investing plan. The best time to invest may be during periods of stock rises and falls.

If you examine every market fall in the past, you’ll see that some industries have been significantly more impacted than others. For instance, the tech industry is currently undervalued, yet even though many of us benefit from work-from-home opportunities, the impact of rising gas prices is still felt.

That’s why you should never put all your eggs in one basket.

Remember that everything is temporary

What causes the stock market to rise and fall? pretty much all things in the world and around us.

Now that you know more about what drives stock prices up and down, investing in shares of successful companies at fair prices and holding onto the shares for as long as the companies are successful is the most reliable way to make money in the stock market.

Are you aware of any other potential causes? What else would you like to add that I didn’t?

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