REASONS WHY STOCK PRICES PLUMMET

Sometimes, stock prices decline, which often happens in stock markets around the world. There are various reasons as to why prices plunge, some of which are not obvious.

Research Notes

In some cases, a sell-side analyst will indicate a negative research note on the company either before or after the release of earnings. Such commentary, even if it is only slightly negative, can impact the manner clients think, especially the short-term oriented ones. Therefore, certain selling pressure often occurs.

Huge newswires will frequently announce the issuance of a brokerage firm report. However, individual investors may have difficulty accessing these or the company itself may release certain information about the report to the general public. Investors may use the details as a buying opportunity once the selling pressure dwindles, granted there have been no fundamental changes in the firm.

Faulty Figures

There are certain fundamental reasons for stocks to descend following the announcement of earnings, such as the firm’s gross margins dropped or its cash position plummeted. Or, the entity may be allocating too much money on selling, general and administrative expenses (SGA) for launching a new product.

It is important for investors to review these announcements thoroughly to find out if and how a firm surpasses projections. This factor is of the utmost importance since any shortcomings may reflect in the stock price sooner or later. Also, look for the following: sequential or year-over-year changes in gross and operating margins, decreases in cash balances, and huge one-time additions or subtractions from net income. And forget not to look beyond what the analysts and the media are saying after the release, as their assessment of the situation may emphasize a facet you have overlooked.

Major Shareholder Selling

If a particular event surfaces or if they seek to sell their stock at a specific price, some institutional investors set a target. Therefore, the supply of shares available for sale normally pulls the price down after an occurrence.

An average investor can figure out if a major stockholder is unloading his position by looking at the individual trade volumes on the tape. By doing so, investors can determine if institutional selling makes the share price slide. After the selling, presuming the corporation’s fundamentals are intact, the stock price frequently snaps back swiftly, creating a great buying opportunity for long-term traders.

Failure to Meet the Whisper

Yes, companies will outperform the average Wall Street estimate. No, they won’t be able to meet to match the whisper number. Hence, its stock price dives. This number is simply a rumor or an unofficial estimate circulating around the Wall Street. Although being aware of this won’t make an investor do so much to defend against this, it can explain some sell offs.

Future Insight

Following the issuance of earnings, most public corporations hold a conference call. During the meeting, management may give predictions or guidance about their entity’s future prospects. Investors need to remember any guidance is the opposite of the investment community’s expectation, which can affect the share price. As much as possible, participate in the conference call or at least listen to the replay tape that is made available an hour or two after this.