Behind the pulses: Factors influencing stock prices
Various factors may influence the stock prices. A few of the most prominent factors are performance of the company, industry, the economy as a whole. The reason which forms the crust of changes in stock prices is the supply-demand factor.
The value of a stock tends to increase if there is an increase in demand for that particular company’s stock in the market. On the other hand, if the demand is less, the prices fall. Also, when the demand is low, if there is surplus supply of stocks available, the stock prices have a sharp decrease. But, if the demand is high and only a limited number of stocks are available, the stock prices increase.
Investors also choose to buy or sell a company’s stock based on company’s news and performance. Some company-specific factors that can affect the share price are news releases on earnings and profits, future estimated earnings, announcement of dividends, introduction of a new product, a product recall, securing a new large contract, employee layoffs, anticipated takeover or merger, a change of management, accounting errors or scandals, etc,. If a company’s earnings increases or is likely to increase, the price of its stock also increases. If a company is in news for wrong reasons, then the price of its stocks is likely to decrease owing to the possibility of huge loss.
Next comes the performance of the particular sector or industry. Often, the stock prices of the companies in the same industry tend to influence each other. Sometimes, the stock price of a company will benefit from a piece of bad news for its competitor if the companies are competing for the same market. Thus, performance of the competitors within the same industry might cause an increase or decrease in the stock prices.
Investor sentiment or confidence can cause the market to go up or down, which can cause stock prices to rise or fall. The general direction that the stock market takes can affect the value of a stock:
bull market – a strong stock market where stock prices are rising and investor confidence is growing. It’s often tied to economic recovery or an economic boom, as well as investor optimism. This could result in more buying of stocks.
bear market – a weak market where stock prices are falling and investor confidence is fading. It often happens when an economy is in recession and unemployment is high, with rising prices. Investors tend to sell off their stocks to avoid huge losses.
Apart from these, economic factors such as interest rates, performance of the economy as a whole, inflation, economic and political shocks, the value of the country’ currency all have their part of impact on the stock prices. High interest rates tend to decrease stock price. If it looks like the economy is going to expand, stock prices may rise. Investors may buy more stocks thinking they will see future profits and higher stock prices. If the economic outlook is uncertain, investors may reduce their buying or start selling. Changes around the world can affect both the economy and stock prices. For example, a rise in energy costs can lead to lower sales, lower profits and lower stock prices. An act of terrorism can also lead to a downturn in economic activity and a fall in stock prices. If a new government comes into power, it may decide to make new policies. Sometimes these changes can be seen as good for business, and sometimes not. They may lead to changes in inflation and interest rates, which in turn may affect stock prices. If the value of the nation’s currency is high, it might not attract foreign customers thus reducing the profit from domestic foreign market. These are a few factors that influence stock prices.