Why Investment Values Go Up and Down: A Guide for Beginner Investors
If you've recently started looking at investments, you've probably noticed that investment values rarely stay the same. One day investments might show nice gains, only to drop the next day. Understanding why these changes happen helps you make better decisions and stay calm when markets get bumpy.
Supply and Demand: The Basic Driver of Price Changes
The main reason investment values change is the balance between buying and selling:
When more people want to buy than sell, prices go up
When more people want to sell than buy, prices go down
This simple rule works for all types of investments, from shares and bonds to property and cryptocurrencies. But what makes people want to buy or sell? Let's look at the key factors.
Economic Factors That Change Investment Values
Economic Growth
When the economy is doing well, companies often make more money, which can push share prices higher. During tough economic times, companies may struggle, causing investment values to fall.
Interest Rates
When interest rates go up, it becomes more expensive for businesses to borrow money, which can reduce their profits. Higher rates also make savings accounts more attractive compared to shares, often causing share prices to drop. Property values are especially affected by interest rate changes, as mortgage costs directly impact what people can afford.
Rising Prices (Inflation)
When everyday items get more expensive over time, it's called inflation. Inflation can make some investments worth less in real terms. However, investments like property, commodities, and shares in companies that can easily raise their prices often do well during times of high inflation.
Company Factors That Affect Share Prices
Profit Reports
Every three months, companies report their profits. Companies that do better than expected often see their share prices rise, while those that disappoint investors usually see their prices fall.
New Leadership
When a company gets a new CEO or management team, it can change how investors view the company's future. This might make people more or less willing to invest in the company.
Product Developments
New products or services can boost a company's growth and share price. On the flip side, product failures or recalls can hurt a company's reputation and profits, leading to falling share prices.
How People's Feelings Affect Markets
Fear and Greed
These strong emotions often drive market behaviour. Fear can cause panic selling even when a company's fundamentals are strong. Greed can drive buying sprees that push prices too high.
Following the Crowd
Many investors simply follow what others are doing instead of making their own decisions. This behaviour can make market movements bigger in both directions.
News and Social Media
What people see in the news or on social media can quickly change how they feel about investments. A single news story or viral post can sometimes cause big market movements in a matter of hours.
Outside Events That Impact Investments
Political Changes
Elections, new laws, and conflicts between countries create uncertainty, which markets usually don't like. Changes in regulations can significantly affect certain industries, changing their growth prospects and values.
Natural Disasters
Floods, earthquakes, and other natural disasters can disrupt business operations and supply chains, affecting investment values across different sectors.
Health Crises
As we saw with COVID-19, health emergencies can dramatically change how businesses operate and how people spend money, causing big swings in market values.
Practical Tips for Beginner Investors
Understanding market changes can help you:
Focus on the long term rather than worrying about day-to-day price movements
Spread your investments across different types to reduce overall risk
Invest regularly to smooth out the effects of market ups and downs
Keep some emergency savings so you don't have to sell investments when prices are down
Look for buying opportunities when good investments are available at lower prices
The Bottom Line
Investment values will always go up and down. These changes happen because of economic conditions, company performance, investor emotions and unexpected world events. By understanding these factors, you can invest with more confidence and make better decisions.
Remember that market ups and downs create both risks and opportunities. Successful investors typically focus on their long-term goals rather than getting too worried about short-term market movements. With time and knowledge, you can learn to use market changes to your advantage.