At times you wonder why the stock is falling despite very good fundamentals. There are many reasons why short-term stock price diverges from long term fundamentals.
At times you wonder why the stock is falling despite very good fundamentals. There are many reasons why short-term stock price diverges from long term fundamentals. Though the major reason for the price-fundamental mismatch is the expectation but there are few other reasons why a stock prices move lower even on good news. Let’s see them.
1. Market Sentiments
If market sentiments are not bullish, it can overlook stock-specific factors like good earnings or good fundamentals. Apart from the market direction sector specific sentiments can also impact the stock prices.
2. Profit Booking
Large investors target good results outcome to unwind their large position. Large investor holds substantial number of shares and if they plan to sell them on any given day the stock price can come down sharply and so on good news or good result outcome, large investors can unwind their long position easily without much of a price damage.
3. Interest Rates
A rise in interest rate can potentially lower stock prices – even if fundamentals of a particular stock are excellent. As an investor you may not be ready to take the risk of investing in stock when you can get good appreciation of your money elsewhere without any risk. The only reason I can think for Indian market under-performance. We see lot of money being gushed out of Indian equity market but the Re-USD price is not impacted to the extent it should. The only reason I can sense for it is – large investors and foreign investors think putting the money in risk free debt market is much more beneficial than remain invested in equity market because of less upside potential from the current levels.
4. Mode of Earnings
Producing winning numbers may not be enough. Occasionally company can report a one-time gain because of unexpected factors like – a lower than average tax rate or income from forex changes… Investors not only value number but mode of earnings as well.
5. Future Prospects
Even if results being reported may be very strong, outlook regarding future earnings may not be as strong and this can dampen the stock prices heavily.
Most of the above discussed factor’s reverses to explain price rise on an outcome of weaker than anticipated results.
Share your views in comments below.
Mr Shah says
main reason stocks fall is due to operators who want to screw the retail client.You have not mentioned that.The day after IDFC got banking license stock fel from 140 to 128 abnd in a few days to 122.You shd have mentioned this
Shabbir Bhimani says
Mr Shah. I don’t agree with you on the fact that operators want to screw retail clients.
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Shabbir Bhimani says
The pleasure is all mine Soniya
arunima jain says
This is very important post for all traders !! Thanks for postiong this !! it’s helpful for me too
Trading Tips Provider says
Thanks for sharing this very important reasons about “Why stock prices go down….”.this information is very useful for traders and also for making lots of money from trading.
Puneet Arora says
I agree to Mr. Shabbir but there are issues like Corporate governance, insider trading and price rigging by operaors that are playing a very vital role in deciding the short term or long term growth of a stock.
For a retail investor it is always advisable to invest through ETF as they provide the flexibility and liquidity of stocks and also the strenth of the most reliable portfolio like NIFTY, Midcap index, PSU Bank index