Decline: What It Is, How It Works, Example

What Is a Decline?

A decline is a situation in which a security's price decreases in value over a given trading day and subsequently closes at a lower value than its opening price. It can also be used in reference to other metrics, such as revenues and expenses, used to measure performance of the given security.

A decline can happen for several reasons, including a reduction in the firm's intrinsic value or as a result of changing market sentiment.

Key Takeaways

  • Decline refers to a drop in a given security's price over the course of a given trading day.
  • A decline can occur due to various reasons, such as a reduction in a firm's intrinsic value or the security's price dropping below its support level.
  • Analysts use decline in value as an indicator of performance.

Understanding Declines

In addition to decline, investors and analysts use other synonymous terms, such as reduction, decrease, downturn, downswing, downtrend, devaluation, depreciation, diminution, ebb, drop, and slump to describe negative growth or a negative growth trend.

A decline is generally in share price, revenues, expenses, earnings, earnings per share, assets, liabilities, shareholder's equity, and cash flow, and is calculated using the growth rate formula, which is the product of the final value less the starting value divided by the starting value multiplied by 100. If positive, there's an increase in growth. If negative, there's a decline in growth.

22%

The largest single-day decline in the history of the U.S. stock market occurred on Oct. 19, 1987, later dubbed Black Monday. On that day, the Dow Jones Industrial Average fell 22%.

How Declines Are Used

In general, analysts look at a decline as being indicative of poor performance. However, a decline in some financial statement line items can be a sign of strength.

For example, a decline in expenses may signal improved business efficiency. A decline in debts may be indicative of increased cash flows or improved earnings.

A decline in taxes carries different interpretations depending on the studied target. For some, it is a sign of improved management, but for others, it is a sign of poor corporate responsibility.

However, most agree that a decline in earnings is unfavorable. Just as with any measurement, the interpretation can vary. Alone, a decline does not give the full picture of an organization's health and operational efficiency. Used with other measurements, it is a useful tool for analysis.

Example of Decline

If a company has sales totaling $100,000 in year 1 and sales totaling $150,000 in year 2, the growth rate is 50% (($150,000 - $100,000) / $100,000 x 100).

In this example, it is evident that sales increased, which would equate to increased growth. If sales decreased in year 2 by $50,000, the growth rate would be -50%, indicating a decline in growth (($50,000 - $100,000) / $100,000 x 100).

What Causes the Stock Market to Decline?

Stock market downturns can be the result of any number of factors, such as falling consumption, rising prices, or reduced investments in the economy. Stock market declines can also be the result of monetary tightening, which can have the effect of raising interest rates.

What Is a Structural Decline in Finance?

A structural decline is a downward shift in prices or productivity due to a change in the underlying fundamentals of the market, such as technological shifts in productivity or long-term changes in the cost of essential inputs.

What Is a Cyclical Decline in Finance?

A cyclical decline is an economic downturn that naturally follows after a period of economic expansion. Falling returns, rising labor and borrowing costs, and decreased consumption may all be contributing factors to a cyclical decline.

The Bottom Line

In economics, a decline refers to any period of downturn, ranging from a company's falling stock price to a country's falling GDP. Financial analysts and economists closely watch economic figures and attempt to predict when declines will happen.

Article Sources
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  1. The Economics Classroom. "Key Formulas in Macroeconomics."

  2. Accounting Tools. "Growth Rate Definition."

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