Factors that influence stock prices
Influences that effect stock prices?
Stock markets are highly volatile and the volatility happens due to a number of factors. The principle factors that affect changes in stock prices include:
- Market sentiment
- Industry performance
- Government policies
- Company news
- Market Capitalization
Market forces such as supply and demand determine the share prices. Optimistic investors buy a stock and pessimistic investors sell the stock.
Stock prices are also driven by something known as ”herd instinct”. In a bull run, if investors prefer buying a stock then the demand increases and so does the price. Alternatively, when people prefer selling the stock for whatever reasons, it increases the supply of the stock in the market and thereby prices of the stock declines resulting in a bear market.
Generally, stock performance is also determined by the performance of the industry that the company is into. Stock prices of the companies in the same industry often move in tandem with each other.
But once in a while a company will also benefit from a bad news for its competitor if both the companies are competing for the same market.
Economic and government conditions also directly or indirectly affect stock prices. Changes in economic policies, interest rates, inflation, deflation, fluctuations in global economic conditions such as crude oil prices, war, natural calamities in turn affect stock prices.
Economic and political shocks such as an act of terrorism can also make stock prices fall.
Company fundamentals often decide why certain stocks are more preferred than the others. Company-specific factors which affect share prices include:
- Earnings and profits
- Share splits, Dividends and share buy-backs
- Change in management, mergers etc..
- Employee layoffs
- Introducing new product or product recall
Often a company’s value is determined by its stock prices. The right way to determine the true-worth of a company is by understanding its market capitalization. Market capitalization can be calculated by multiplying all outstanding shares by price of a single share.