One day the Dow is up 200 points and the news reports that investors believe the economy is getting better. The next day it drops 200 and the news reports investors believe the worst is yet to come. Who are these fickle investors and why are they that way?
Compared to many other markets, stock markets are not volatile at all.
That said, if any news report is actually telling you that swings in the Dow average are indicative of economic trends, you can write the reporter off as a moron. The stock market is very, very tiny compared to the GDP of the country as a whole.
FWIW, 200-point swings on the Dow are not particularly common.
A wise man (my Dad) claims that the wide swings of the Market are an indication that traders are unsure of the actual value of the stocks they are trading.
Traders could give a happy rat’s ass what the actual value of stocks are.
The chicken shit investors I can live with. It’s the moronic analysts that are constantly talking out their ass that piss me right the hell off. One week they run their ignorant mouths about a particular stock and it plummets and then the next they change their mind with a simple “My bad”. I’m working on a list and heaven help these assholes if I ever catch them alone in an alley.
From Global stock values top $50 trln: industry data:
As for market volatility, the answer is closer to Mongo Ponton’s comment than it is to beowulff’s.
That, and the Dow is not representative of the market as a whole. Much better to follow the S&P 500.
Traders know exactly what the value of the stocks they’re trading is: whatever someone is willing to pay for them.
…Which explains wild fluctuations. Something one doesn’t see in most other markets which trade tangible items.
Commodities markets can see swings as bad or worse.
Just a WAG, but perhaps it’s partly due to positive feedback loops. What I mean is, there are a decent number of traders who buy a stock simply because it’s going up. They invest on momentum; or they figure someone else must know something; or whatever. So when a stock starts going up, the process can feed on itself for a while.
Similarly, if a stock starts going down, the process can feed on itself.
As a result, the stock market can have a lot of violent swings.
Just my WAG.
It really isn’t that volatile. News media like to talk about it like it is, and lots of financial analysts spend lots of time talking about market ‘changes’, but it really doesn’t change much.
Look at the change as a percentage rather than the raw points, and you will get some perspective on this. Event yesterdays drop, which was talked about as an unusually large drop of -206.48 points, was really only 1.59% change in the market value.
Here is a chart which shows the 30 Dow stocks.
Often times, it is only a couple of companies which are up/down considerably in a given day.
If the news that day is a decline in oil prices, check to see how much of the Dow’s movement came from Chevron or Exxon. Banking news? Watch how much of the Dow’s change came from Citigroup or Bank of America.
Wikipedia on how the Dow Jones Industrial Average is calculated
That doesn’t sound small to me.
So, let’s say - long term – that the market goes up about 9% a year. . .the fact that it *regularly *changes by 1/5th of that IN A DAY, I find pretty shocking. Yeah, 9% is an average and many years it has gone up (down) way more than that.
Now, I really don’t care. I buy stock, and hold it, and will cash it in when I retire.
But, I find it hard to believe that valuations can differ so much from the beginning of one day to the next. .1% maybe. But, a whole percentage point, or more, seems large to me. I’d expect to see that a couple times per year, not every week.
The Dow is 30 stocks. Look at the S&P 500 for a more balanced view of the market.
But the S&P has some “wild” swings, too, if we take “wild” to mean the type of swings the OP is talking about in the OP. The S&P500 was down 1.7% yesterday. The Dow was down 1.5%. They usually track each other pretty closely.
The total market capitalization of all companies that are publicly traded might be the total *potential * value of the market, but that’s different than the market. You wouldn’t describe the US real estate market as the total value of all real estate in the entire country–just what’s for sale.
Actual numbers for the entire market are hard to come by, but as an anecdotal example, let’s look at Fannie Mae, which traded “heavily” Tuesday. They traded 33M shares at $29.35. The market cap is about $28B. So in one day, about 3.5% of the total value of the company traded. Average volume over the last three months is about 2/3 of that. Looking at a different example, less than 2% of VeriSign has traded on an average day.
The market is volatile because there are millions of investors spending millions of dollars with their own game plan, all seeking to maximize their revenue. As others have pointed out, there is a price point which people will pay to enter the market (i.e. buy a stock). The motivation for buying and holding or buying and selling a stock is like two snowflakes, no one is identical. There are people like my friends who still day trade at work, and there are people like me who try to take a Buffet approach and buy and hold. These two approaches branch of into a myriad of buying and selling scenarios which culminate into the forces of supply and demand. Sprinkle into that mix a hefty does of misinformation/incomplete information, the result is plenty of room for volatility.
In fact, this point can be illustrated by a few comparison charts of the two indices:
3 month: ^DJI Interactive Stock Chart | Dow Jones Industrial Average Stock - Yahoo Finance
1 year: ^DJI Interactive Stock Chart | Dow Jones Industrial Average Stock - Yahoo Finance
5 year: ^DJI Interactive Stock Chart | Dow Jones Industrial Average Stock - Yahoo Finance
The S&P is a much better index not just because it contains a more representative sample, but because it is better weighted. Nevertheless, the Dow generally behaves in much the same way.
In direct response to the OP, aside from technical or rational reasons, one big reason for volatility is that people are emotional, emotions are volatile, and securities trades are driven more by emotion than what a lot of people would like to admit.
I’m not a particular expert, but I’ll suggest a couple things.
First, there can be events which affect the market as a whole. Things like 9/11 (to take an extreme example) can have an overall effect. Also, there can be changes in things like interest rates which change the relative desirability of stocks as a whole compared to other investments.
Second, as I think has been mentioned, there are a lot of people who invest based on momentum. Use Apple as an example. In a period of about 18 months, it had moved from around $75 up to $200 around the start of this year. Then it started dropping, and I think that some people who had made this profit wanted to lock it in, so they sold on the drop, which just causes a further drop. I think it got down to $115 or so at the bottom, and now it’s back around $180.