Junior Investor Demos

05.03.2004
What Makes the Stock Market Go Up or Down?

The answer to this question can be complicated, but on the simplest level understand that the stock market is a dynamic marketplace driven by the collective opinion of millions of investors. When investors are optimistic about the economy in general and the prospects of specific companies in particular, they are willing to buy stocks at higher prices with a belief that companies' success will lead to still higher stock prices. When investors are worried about the economy and companies, they will be less inclined to buy stocks. When more people want to buy the same stocks, the price of stocks go up. When there are fewer buyers for a stock, its price will drop.

On the economic front, one thing that investors are currently worried about is the possibility that interest rates may go up. The Federal Reserve plays an important role in setting interest rates. A few years ago, when the economy was in a recession, the Fed lowered interest rates to make it easier for companies and individuals to borrow money. The idea was that this would help the economy recover. In fact, interest rates are now at the lowest levels they have been in 46 years. Now, it appears the economy is starting to recover and the Fed has hinted that they might start raising interest rates soon. Investors worry that higher interest rates will make it more difficult for companies and individuals to borrow and that in turn that might hurt company profits and stock prices. The Fed, on the other hand, worries about the economy growing too fast, leading to inflation. It's all a balancing act.

Another thing that investors worry about is political and world events. Concern over the war in Iraq and other political instabilities can also affect the market.