If one thing every investor can agree on is, “Share prices change every single day”. Ask anyone about the stock market and the fluctuation in stock prices. There are market forces which increase or decrease the share prices. Most common among them is supply and demand which determines the stock price at the most fundamental level. If more individuals wanna buy a stock (demand) than sell it (supply), then the price moves up. But, if the supply is greater than demand then the prices would fall. Most novice investors are not aware of this and have a lot of questions in their mind like –
- What causes the stock price to rise?
- How are share prices determined?
- How does a share price increase?
- Who sets the price of stocks?
- How do share prices fluctuate?
To help you in understanding the reasons behind the fluctuation in share prices and the forces that causes this volatility, we are going to give you a brief overview. When you finished reading, you will know a lot more than other novices and investors of the stock market.
There are certain factors which cause the stock price to change. Let’s discuss each one of them in details.
News & Company’s Performance
It is difficult to fathom why some people like a particular stock and dislike another stock. Well, the possible reason which comes down to figuring out is the news and performance of the company one invested in. Any major or minor news regarding a company can change the perception of an individual towards that company’s stock. Whether it is about the earnings, an announcement on dividends, launch or a new product or re-launch, merger & acquisition situation, employee layoffs, controversy, change in management or could be an accounting error.
It all depends upon the whether the particular news is positive or negative. But, the most important one is the earnings of a company. If a company can’t make profits then no company can survive in the long run. A company needs profits to continue working especially a public listed company which required submitting quarterly reports four times a year. So, if the company is not showing any improvements in its quarterly reports then the stock price will fall. But, if the company surprise with its results and show better than expected growth then the stock price jumps up.
But, nowadays earnings are not the sole reason for fluctuation in stock prices. Investors have developed hundreds of variables, indicators, and ratios include the P/E ratio, to analyze the company’s stock performance.
Industry & Sector Performance
You must’ve heard of industry sector analysis which is a very important part of small businesses and strategic planning. Even large firms and companies require timely sector analysis to keep tabs on their own operations and position in the market. It is because the market conditions generally affect the companies or firms in the same industry in the same way. Sometimes even a piece of bad news for a competitor can raise the shares price of the company that is competing in the same market.
Investor’s sentiment and confidence level can also change the prices of stock. Generally, the market goes in two directions which named as –
- Bull Market: It is the market where the share prices rise which encourage buying. It mostly happens in economic recovery or an economic boom.
- Bear Market: It is the market where the share prices fall which encourage selling. It mostly happens when the economy is in a recession and the unemployment is high.
- Interest Rates: The economic indicators also affect the stock market which leads to fluctuation in share prices. For starters, the interest rate decisions (also known as monetary policy) taken by Reserve bank of India can increase or decrease interest rates which further affect the borrowers and lenders. If the interest rates are high then it is difficult for the company to borrow money to expand its operations and projects because higher interest rates will increase the debt. This could reduce the profits of the company and the dividends it pays to its shareholders. As a result, its share price may drop. Plus, the higher interest rates tend to be more attractive for investors.
- Change in Oil Prices: Change in global oil prices has a big influence on the stock market and other financial markets. If you are wondering, “How stock market affected by the change in oil prices?” then you need to understand that India majorly depends upon oil imports. Plus, the transportation sector is strongly correlated with the sports price of oil. However, this effect could be positive, negative, or neutral. But, there is certainly a correlation between the stock market and oil prices.
- Economic & Political Outlooks: Any major or minor change around the country can influence the stock market which could lead to falling in share prices. For example, an act of terrorism can affect the stock market very much and fall in stock prices.
- Value of Indian Rupee: There are some economic indicators like rupee-dollar relation which affect the share prices on a short-term basis. For instance, if there is depreciation in rupee value then stock prices tend to fall except the IT sector which gains from the falling value of rupee.
Apart from this inflation and deflation also plays a key role in fluctuating in stock prices.
Stock Prices can be affected by:
- News & Company’s Performance
- Industry & Sector Performance
- Investor Sentiment
- Economic Factors
Hope, this article helped you in clearing your doubts. Nevertheless, if you have any query or would like to add something then don’t forget to mention in the comment section below.