by Christina Pomoni

Created on: January 20, 2012

Over the past century, the stock markets around the globe have experienced sharp fluctuations. In most of the cases, negative news about the economy had an adverse impact on investor confidence and share prices. In addition, low consumer spending, low corporate profits and overvaluation of stocks - along with a number of other factors, including corporate corruption - have led even to stock market crashes. The most prominent examples of sharp stock market fluctuations / crashes are the

1929 market crash, the 1987 crash, the 1997 Asian crisis, the 2000 dot com bubble and the 2006 housing bubble.

So, why do stocks markets fluctuate? The following are factors that explain stock market fluctuations.

1. Demand & Supply

The stock market should be regarded as an auction place where buyers and sellers follow particular strategies in the aim of voluntary exchange. Supply and demand determine the level of auctioned prices. When there are more buyers for a certain stock, the share price is rising because demand is greater than supply, making the stock more valuable. In contrast, when there are more sellers for a certain stock, the share price is falling because supply is greater than demand, making the stock less valuable.

2. Investor behavior

Another important parameter that can explain stock market fluctuations is investor behavior. Behavioral Finance considers investor behavior as a fundamental factor that challenges the efficiency of capital markets. The way investors react to certain corporate news and economic developments determines their buy-and-sell decisions. Although, investor behavior was originally assumed as rational, historians suggest that investment decision making is psychologically biased to a great extent. In fact, human emotions and psychological traits influence investment decision making and stock selection. In this context, Behavioral Finance can explain sharp market fluctuations when investors massively sell their securities, feeling unconfident about the economy.

3. Market speculation

The assumption of rational investors has been also disputed based on the frequency that speculative bubbles have occurred in stock markets. Often, investors prefer get-rich-quick schemes rather than rationally formed investment decisions. This is the result of heavy speculation that selects investments with higher risk in the anticipation of a price movement that will provide even higher returns.

4. Consumer expectations

Consumer expectations about the economy

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