Stock Price Charts

How does the stock index affects the behaviour of individual stocks?

Public Comments

1. Indices does relates to holding of stocks of course price and value wise.In what context you got trapped? on loan point of view?
2. i believe it's the other way around.
3. Good Question. I think stock index will affect the behavior of the individual stocks that constitute it. The main effect comes from psychological barriers. For example, when Dow reaches 8500 or such major round mark, traders will begin selling the stocks that make up the index, assuming that when it crosses 8500, there will be a minor correction and they can profit from it by selling the stocks short and covering them later at a lower price. Technical traders also look for support and resistance levels of indices to decide when the constituent stocks will fall or turn around - when indices reach resistance, the stocks would tend to fall soon, and when the indices reach a support, the stocks could rise soon. Here's one way you can put this to practise - let's say you have some INTC stocks that you bought at 13, with the goal of selling it at 15. Suppose Nasdaq was 1500 at that time. Let's say INTC rose to 14.75 and nasdaq rose to 1695 during the same period. What should you do? You should sell INTC at 14.75, and not wait for it to reach your price of 15. Why? Because nasdaq has reached a psychological mark of near 1700, it is more likely to go down in the near term, rather than rise, hence if you wait for the last .25 of your price for INTC, you may never get it. You may have to sell it at 14, rather than at 15. Thus, you could make sell and buy decisions of individual stocks based on proximity of the indices to psychological or support/resistance barriers.
4. well, an index is supposed to be an indicator. you should be able to extrapolate performance of the index, considering the beta of the individual stock, to see what should be happening with the stock. the index won't directly affect the stock, except for special events (if the stock gets added to the index, let's say). but generally, the tail doesn't wag the dog. the index is a compiler to show what's happening with individual issues, so the individual stocks affect the index more so than the other way around.
5. When the index markedly falls, some investors get nervous, and sell individual stocks in their portfolio, regardless of how the company is actually performing. if enough small investors sell a stock, that stock will fall. Likewise, when the index rises substantially, some investors will jump into buying, again regardless of actual performance. If enough investors buy a particular stock, that stock price will rise.