WHY DOES THE STOCK MARKET GO UP AND DOWN?

The key to making money in stocks is not to get scared out of them – Peter Lynch

As the topic suggests, most of us have seen the fluctuations happening in the market always. Daily we keep hearing that market is up by a certain percentage and the next day it would have fallen for a certain percentage. The same happens with stocks too. 

We know that stock is a kind of investment. We also know that FD is another kind of investment, which gives you 6% to 7% consistent returns in a year. And we have observed that the stocks of the company may fluctuate by 3% to 7% in a day itself. Go and check out the NSE website. You see that certain stocks are up by 5% to 7% in a day itself.

Someone who would have invested in that particular stock yesterday would have already made 7% returns. Wow! For a moment everyone would have thought that you could become rich quickly then. But do you think it’s possible every time to pick up such kind of stocks? No! 

Predicting the future is something near to impossible. So the fluctuations in the stock prices are very common in the stock market and such a scenario makes the novice nervous and another way it makes the people start trading in the stock market. At the end of the day, everyone is trying to predict the market if they are trading. 

However, if you are an investor you will look into the actual value of the company by doing intrinsic or actual valuation and make the best portfolio and risk management. Since stocks fluctuate a lot, it goes up and down a lot. Many people start to trade in it. And some wait for the right price to come. 

So the stock market works on future performance only. Whatever happened with the company is public information. Everybody knows that the companies listed in the market have made certain revenue, good clients, certain profits and that’s why they are valued in the market. But whether they will grow from here is a point of analysis. 

From the analysis, we should find out if the company will survive for a longer period or beat the competition in the market, or will they be able to give similar cutting edge products or services to the clients in the future as well. 

So predicting the future performance of the company is always taken into consideration by both traders as well as investors. Predicting the future for the next 10 to 15 years is very difficult and once you bring it down for today’s time, then you see that fluctuation in the market becomes inevitable and it has to happen. 

It’s very important to know that these kinds of fluctuations will be there when you are going to invest in the stock market and you need not have to worry. 

  BOOK VALUE 

Book value is the exact value of the company at which it stands today. It represents the total amount a company is worth if all its assets are sold and all the liabilities are paid back. 

I calculated the actual book value of the company by taking the example of Larsen and Toubro Ltd. Now if we calculate the book value and the total profits of the last four quarters of LT, it is getting the returns at 15% on the company. But if you had divided the LT’s total profit of the year to the market cap value, you will see that hardly 5% return is there. 

So you would always wonder and question that even with such a huge market cap why it’s making such a less profit. So the idea here is you need to look at what is the capital which is deployed i.e. the book value and not the market cap value for calculation. 

Let’s have a look at the factors that affect future value. Let's think of LT itself. When you ask people, will LT continue to make the same 15% return in the coming years? Some may say yes. Some may say no. Some may tell they can make more than this or lesser than this. Some people who know LT very closely and know their moves may say that LT is going to give better quarterly results and may grow at 18% by next year. Some may tell that no! They are not doing well and their profits may drop to 10%. 

So people have different expectations based on different kinds of analyses which are available to them. One constant underlying thing is, everybody is using a certain formula, and based on those formulas and numbers and outcomes, they decide about whether a certain company will give better performance or not. That’s why they think of giving a better premium to the stock prices.

Sometimes if the whole economy is not going to do well, the company’s stock prices may fall that particular time. Similarly in the sector in which LT is performing, if it is not performing well, it may go down. And if the company itself is not performing well, like instead of 15% returns they got 14% next year, again the share fluctuation will be very high. Because only based on a 15% return which is like double the FD returns, people are ready to pay more premiums. 

I have created these blogs on most common queries, mainly for people who are new or willing to invest in the stock market. You should not be worried about these fluctuations in the market. These are the part and parcel of the stock market. This whole market is made up of the cumulative performance of all the stocks in it. That’s why you see that there is a good amount of fluctuation, highs, and lows in the market. 

But yes! the better the company the better the stability it will have. As you see good companies in India like Reliance, Infosys, TCS, etc will have lesser fluctuation in the market when compared to other companies. 

THE CONCEPT OF BETA

Beta is nothing but a measure of particular stock’s volatility about the market.

High-beta stocks are supposed to be riskier but provide higher return potential as compared to low-beta stocks that provide lower returns. You can Google and check the beta stocks in the Indian stock market to get a complete list. They fluctuate lesser than even the indexes.

If you look at more stable companies and predictability of business is very high, such companies will have lower beta and they will fluctuate lesser than the market. So there are companies that have beta lesser than even 1.

Think like if nifty go 1% up, this stock will also go 1% up, or if it falls 1% then this too shall fall to 1%. In that case, you say the beta of the company is 1. There are also companies which fluctuate more than the market, their beta will be higher.  

UPPER CIRCUIT/ LOWER CIRCUIT

If you are someone already in the market, you would have heard of situations like market getting halted for certain minutes or hours or sometimes the whole day by the exchange, due to high volatility. Since we have a lot of unpredictability in the market, stock exchanges try to correct it by keeping certain limits.   

The stock exchange has fixed certain limits to the stocks above/ below which it cannot trade in the market and these are called upper/lower circuit. And the limits framed are called as circuit limits. 

Let’s say within a certain time frame, the market opened and went up by 10%, then the exchange will halt the trading for certain minutes and reopen later. If the circuit is again going up for the next 5%, then they will again stop for more period. Probably if the third circuit happens, trading will be stopped for the entire day. 

Similarly, it happens with stocks also. And there are different kinds of upper and lower circuits defined for different stocks and the exchange.

CONCLUSION

I hope now you can explain to someone when they ask you why the market go up or down. The price of the stocks gets determined in the present because of the future expectations of the company. 

This is the reason why it’s impossible to predict the future; we can only go close to it. 

Just because of this factor you see that the market fluctuates up and down.

But neither do I recommend you to take advantage of it and become an intraday trader nor to worry about it.

Always wait for your prices to arrive. There is no right or wrong time to enter or exit the market. And don’t be worried or hyper-excited from the market. All you have to do is keep investing in value stocks.

Keep developing your portfolio. Maintain discipline.

If you are new to these blogs, I suggest you check out my other blogs on most basic queries on the Indian Stock Market which will help you build a strong base before you begin exploring,

1) Why does the stock market exist?

2) How does someone make money in the stock market?

3) Why do people lose money in the stock market?

4) What are the risks of investing in the stock market?

5) How to invest in the stock market without taking anyone's help?