Spike - Term Overview

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In the stock market, the movement of the price of a relatively large financial asset up or down in a short period of time is known as a spike.

Relatively, since a stock that moves on average 10% isn't the same and one day moves 16%; that a stock that moves on average 2% and one day rises 10%. The movement of the first one is bigger but it's not a spike. The second, however, has made a smaller but relatively large movement with respect to its average movement.

All this, being clear that it must be a movement in a short period of time. Understanding as a short period a few hours or even several days. Many times they occur due to market overreactions.

A very clear example of a spike is the movement that occurred in the Dow Jones index on October 24, 1987, better known as Black Monday. The US index plummeted 22% in a matter of hours.

What causes a spike

A spike can occur for many reasons. Financial markets are always unpredictable. And since they are unpredictable, there are many reasons beyond theoretical knowledge why a spike can occur. However, there are two main reasons why a spike occurs. The first is the outbreak of a great crisis. When a crisis breaks out, financial markets crash. It's a function of the severity and the panic of investors its amount and speed. The second and most common is the publication of results. When a company publishes its results, there can be large movements up or down.

Company quotes are established based on expectations. Investors expect the company to generate the estimated profits. When they publish results, there can be roughly three scenarios.

- The benefit is as expected. The price is barely moving. Investors expect the company to generate a profit and the company generates it, therefore they don't change their preferences.
- The benefit is greater than expected: The price is moving up. Seeing that the company generates more profit than expected, they value the company better and start to buy.
- The benefit is less than expected. The price is moving lower. The company has less profit than investors expected and at that time they value their securities at a lower price and sell their shares.

In the last two cases, the amount of the movement will depend on the difference between what is expected and what is published. On the other hand, in case of losses the opposite would happen. Smaller losses than expected would drive the price up and higher losses than expected would drive it down.

Other causes of a spike

Other causes that can cause a spike include the following:

Changes in the company's governing council Political decisions affecting the company Technological changes Wars Natural disasters

Finally, it's important to mention that the same happens in listed companies, it can also happen in assets of another type. Another very simple and enlightening example was the movement of the Swiss Franc / Euro exchange rate. The Swiss Central Bank established a limit during the crisis in which the exchange rate could not exceed 1.20 Swiss francs per euro. On January 15, 2015, the council met and decided to remove the limit. When he announced it, the exchange rate plummeted 30% in just a few minutes.

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