What Are the Causes of the Stock Market Drop?

by Mike Parker, studioD

One of the primary axioms of investments market is "It will fluctuate." When the total value of the stock market is on the rise it is said to be a bull market. When the overall value of the stock market is in decline it is said to be a bear market. A multitude of factors can affect whether there is a rise or drop in the stock market, but the system is so complex that few economists can predict rises or falls with accuracy.


One of the primary factors that affects an individual company's stock price is its earnings. Publicly traded companies typically report their earnings on a quarterly basis. If a company has good earnings, the value of the stock may increase. If the company reports earnings that are lower than anticipated it can cause a drop in the perceived value of the stock, resulting in a drop in the stock price. If a large number of companies report poor earnings, it can have a detrimental effect on the entire stock market, resulting in drop in overall market prices.

Economic Trends

Individual and institutional investors tend to invest based on general economic trends. A healthy economy — one that is marked by low interest rates — a low inflation rate, a shrinking government budget deficit and an expanding gross domestic product, encourage investment activity and can result in a rise in the stock market due to investor confidence. When the economy appears to be less healthy, marked by rising unemployment, high inflation, high interest rates and increasing government budget deficits, investor confidence tends to erode, often resulting in a drop in the stock market.

Breaking News

Momentous events at home or abroad can trigger large bounces or precipitous drops in the stock market, according to the New York Stock Exchange. News of a national tax cut or a peace treaty between warring countries may spur a rise in the stock market, while news of a natural disaster — such as an earthquake in a densely populated area — or the announcement from a major corporation of massive layoffs can cause the entire stock market to drop.


The stock market is driven by basic supply and demand principles, according to the New York Stock Exchange. While the value of a company may be described by its assets and liabilities, the value of its stock is determined by the perceptions of the investors who own the stock and those who wish to buy the stock. The perceived value of the stock may decrease if investors fear future economic trends, or lose faith in company or governmental leadership. If the national mood is driven by those emotions it can cause a general decline in the entire stock market.

About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

Photo Credits

  • Wall Street sign image by Jolanta Zastocki from Fotolia.com