The problem is that the share price can rise or fall even if nothing good or bad happens in the company itself. Therefore, it is very difficult to predict the dynamics of shares over short time periods, which makes them risky assets.
The reason for sometimes illogical behavior of quotations lies in investors themselves: they create panic and excitement in the market. Some investors start to buy or sell shares of a company, others pick up on it, and it gathers momentum like a snowball. As a result, shares rise in price or, on the contrary, become cheaper.
Let's go back to the 2008 crisis. In September 2008, after the collapse of Lehman Brothers, the stocks of many financial companies, including Goldman Sachs and Morgan Stanley, fell significantly due to investors' fears about the stability of the financial system. Some of these fears were unfounded, but the panic led to massive selling of stocks. Investors who sold in the panic lost significant amounts, while those who held stocks or bought at lower levels were able to make good profits afterward.
An example of the opposite situation is the shares of chip maker NVIDIA. They started to grow actively at the end of 2016 - and not because of the success of the company itself. The reasons for the growth were successful reports from other players in the semiconductor industry and forecasts about the imminent growth of the graphics chip market. Investors believed that as the entire industry's revenues grow, NVIDIA's revenues will grow as well. Therefore, they started actively buying the company's shares. As a result, by 2017, NVIDIA's stock price increased significantly.
But when the company itself reported showing good financial results, some investors decided to lock in profits, leading to a correction in the stock. Why? By the time NVIDIA released its reports, the stock was already too overbought, and investor expectations were too high. The company's average performance did not satisfy many people.
Panic and excitement can concern not only a particular company, but also an industry and sometimes the market as a whole. The "dot-com bubble" comes immediately to mind - the explosive growth of stocks of companies in the Internet sector in the late 90s, which ended with the biggest market crash in the early 2000s.
In the late nineties, investors began to invest massively in new technology companies in the United States, based on the potential of the Internet. In just a few years, the shares of these companies appreciated many times over. However, the high share prices were not supported by the companies' actual revenues, but were based on optimistic forecasts. In 2000, investors realized that many of these companies were not profitable. This "Internet company bubble" burst in March of that year. Many new companies went bankrupt and investors lost trillions of dollars. Shares of technology leaders such as Cisco, Intel, and Oracle fell more than 80%.
A similar situation unfolded in the US stock market in 2019-2020. Investors believed that an economic slowdown could be averted if the U.S. and China resolved their trade differences. When the two countries began to come to an agreement in late 2019, investors saw this as a positive signal. In February 2020, major indexes such as the S&P 500 and Dow Jones hit record highs. However, a coronavirus pandemic caused the market to plummet. By March 23, 2020, the indices had lost more than 30% of their value.
These examples demonstrate that investors should be careful not to blindly follow the crowd. It is necessary to analyze the real economic situation and the potential of the company before investing in the stock.