In the quest to make money out of your stock, you need to understand the basics of the stock market and figure out what factors influence the stock prices.
Factors that influence stock prices
Supply & Demand
At the most elementary level, the price of a share changes because of the fluctuations in supply and demand equilibrium. If demand for a stock is more than its supply, the share price increases. Similarly, if the sellers of a particular stock are more than its buyers, the share price decreases.
The sentiment of the investors also influences the price of shares. This means that if they are ready to take risks and are confident about investing in the market, it will shore up the stock prices. Thus, stocks prices are affected by the general direction of the market:
It means that stock prices rise with the growth in the economy and other market factors as the investor is more confident in taking the risk and investing more money in the market.
Due to the low-risk appetite and low confidence among investors, the market stagnates, eventually resulting in the fall of share prices.
Company performance and other internal factors
The stock price of a company depends on how the company is running its business. If the company is consistently booking profits, growing in its market capitalization, and paying regular dividends to its shareholders, its share price will rise.
On the contrary, if the company is not doing great in the market and is unable to pay regular dividends to its shareholders, it has high chances of registering a fall in its share prices.
Other internal factors that can move the share prices are:
- Introduction of new products
- Taking over a new business or a merger
- The resignation of top management executives
- Accounting errors or scandals
- Changes in the company management
Some other economic factors, which are beyond the control of a company but can also influence its stock prices, include:
Interest rates: The RBI regulates interest rates to stabilize the economy. Higher interest rates would reduce the profits of the company, resulting in a fall in share prices. Lower interest rates would mean that the company can borrow money without having to pay much, increasing its net profits and stock prices.
Speculation: If speculation in a particular company’s stock is high, then its stock price would show higher fluctuations and vice versa.
Economy and GDP value: If the economy is on the path of expanding and the GDP is steadily growing, the stock prices may rise and vice versa.
Socio-political factors: Government policies and events (like demonetization, GST, and elections) can also influence the stock prices depending on the effect of the policy on the market.