What causes the volatility in stocks?

Understanding the causes of volatility can be difficult because the market and each company has affecting factors.
Basically there is a major influence caused by supply and demand. If more people are buying a company, then the company stock price should be going up. If more are selling a company, then the company stock price should be going down.

However, there are macro factors affecting the market in general and there are micro factors affecting the individual stock.

So even though it may be difficult to tell exactly what is causing the volatility of a stock going up and down, it is more important for us as investors to realize that stock prices do normally go up and down and we can learn how to take advantage of this volatility.

Therefore, if you’re experiencing a decline in the prices of your stocks, consider how much is actually a true reflection of your company and how much is contributed to the overall decline in the market.

I’ll provide you with an analogy:
Imagine that the US stock market is an ocean.
The ocean goes up and down with waves and tides.
Then there are a bunch of fishermen with lines in the water with bobbers on their lines.
When you buy a company, you have a fish on a line.
The bobber goes down and up (representing the company itself).
So you basically have two things affecting each stock’s price (the market itself going up and down, plus the company itself going up and down).
When both are going down together, there is a stronger effect. The same thing happens when both are going up together.

So just be patient for the ocean wave and tide to go back up.
Also if you bought a good company at a bargain price, you don’t have to worry cause this company will again float back to the top.

If the market is down now and your company is down, this is the worst time to sell (if you did buy a good company).
By selling now when everything is down, you are essentially cutting your line and letting your fish go out of fear that your whole rod may be taken in. But as I said, if you are confident that you bought a good company at a bargain price, you don’t have to worry. Just wait for the market and company to float back up and catch your fish (sell your company) at the top.

In summary, it is crucial that you buy a good company at a bargain price in the first place. When considering to buy a stock, I always ask myself if I’d be willing to hold this company for the next 10 years if I had to.  This is a strategy that Warren Buffett always uses to ensure that he only buys the best companies that he is certain of.

If you do this, then you don’t have to worry much about volatility. Just wait for the stock to meet your desired sell price.

I hope this info is helpful for you.
-Grant

Click Here if you’d like to take advantage of volatility in the market by learning to buy good companies at bargain prices.