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Decline

Reviewed by Sweta | Updated on Sep 30, 2020

Catalogue

Introduction

Decline, in general, refers to a reduction or a gradual decrease in the value or price of an article and so on. In a stock market, decline refers to a reduction in the market price of securities.

Understanding Decline

Technical analysts use different terms to describe the decline in the price of a security. The decline may be a one-off or may be indicative of a downtrend in the price of the security.

The decline also includes an intra-day decline in the prices of securities. Prices of securities may decline in the intra-day and close either lower or above the opening price. A price decline can happen for various reasons either intrinsic to the security or due to general factors.

Factors to consider before you invest

  1. Security prices, especially equities, may decline due to lack of growth prospects or due to corporate governance issues or fraud, and so on.

  2. Security prices also decline due to market forces such as tax policy decisions of the government, low economic growth, slowing manufacturing activity or trade tensions, and so on.

  3. A decline in the price of a security may raise questions on the financial performance of the company or management concerns or the sector as a whole. In a case where the stock is a leader of the sector, the decline may raise future concerns for the sector as a whole. In such cases, the decline may indicate a downtrend or negative growth in the sector.

  4. While a decline in stock prices may be a negative indicator, a decline in expenses is a positive indicator and would suggest better cash flows.

  5. Temporary declines occur due to one-off situations such as a seasonal dip in revenues for a couple of quarters. Such declines also occur due to market forces of demand and supply.

  6. A downtrend in prices is looked at negatively by analysts. However, temporary price corrections may be seen as a buying opportunity.

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