Introduction
The price of a company stock is determined by a multitude of factors. It is primarily based on the performance of the company itself. Economy-wide phenomena such as recessions and stock market liquidity shocks can also dramatically affect stock prices. Despite the various causes for the rise and fall in a company’s stock price, what ultimately drives stock prices is the expectation of future performance of the company. The following sections will provide a thorough examination of the factors that can make a company’s stock price rise or fall.
Supply and Demand
At the most fundamental level, stock prices are set by the forces of supply and demand in the market. When there are more buyers than sellers, the price of a stock will increase. Thus, the market’s sentiments usually reflect the potential gains or losses that a company can present to investors. This concept is similar to the law of supply and demand in a regular market – the higher the demand, the higher the prices. Furthermore, the expectations of a company’s overall performance have a direct impact on the demand for its stock since people would rather buy stock of a company they expect to do well than one which they think will not perform as well.
Financial Performance
The financial performance of a company is an important factor in its stock price. Companies that consistently post increased earnings and revenue will often experience a gradual rise in its stock price. Conversely, a company that exhibits weak financial results for its quarterly reports may suffer a decline in stock prices. A decrease in sales and earnings indicates reduced sales and decreased investor confidence in the company’s future profits, driving down the stock price. Stock prices can be severely affected by any significant changes in a company’s financial results.
Economic Situation
The current economic climate also affects the performance of a company as a whole. Recessionary periods have a particularly strong impact on stock prices. Companies that are in industries that are more prone to suffer during rough economic times will be more likely to experience a decline in their stock prices. On the other hand, companies in industries that thrive when the economy is in worse shape, such as those involved in cost-cutting measures, will be likely to experience a rise in stock prices.
News and Rumors
The news and rumors in the stock market can also have a major influence on stock prices.Positive news, such as winning a major order, an anticipated merger, or a successful product launch, can lead to a sudden surge in the stock price. On the other hand, negative news, such as a lawsuit or the departure of key personnel, can cause stock prices to drop rapidly. Additionally, rumors about a company can also affect its stock price even when the rumors are untrue.
Government Policy
Government policies can also have a major influence on stock prices. For example, investment incentives and tax breaks, such as those provided by the US Government to encourage the development of new technology, can lead to an increase in stock prices. In addition, political uncertainty in a certain region can also cause companies in that region to experience a decline in stock prices.
Short Selling
Short selling is another factor that can affect stock prices. When investors believe a company’s stock is overvalued, they may place a short sell order. Short selling involves selling borrowed shares of a company with the hope that the price of the stock will decline and then buying back the stock at a lower price.
Hedge Funds
Hedge funds can also have a major influence on stock prices. These funds are large, sophisticated financial institutions that are usually invested in diversified portfolios of stocks and other assets. Hedge funds often trade large volumes of a company’s stock, sometimes buying large amounts of stock in an effort to drive the stock price up, or selling large amounts of stock to drive the price down.
Insider Trading
Insider trading is illegal but it is still a factor in stock prices. This is when company insiders buy or sell shares at a price which enables them to get an unfair advantage over other investors. This kind of activity can lead to an increase or decrease in the stock price of a particular company.
Volatility
Volatility is a measure of how much a stock’s price fluctuates over time. A stock that is more volatile will experience more frequent, larger price swings. Unexpected events, such as a significant increase in a company’s profits or a major news item, can cause a stock to become highly volatile, leading to sharp rises or falls in the stock’s price.
Market Psychology
Market psychology is another factor that can influence a company’s stock price. Investors are naturally inclined to “buy low and sell high”, which can cause stock prices to experience a large increase or decrease. For example, if a company releases a new product that is well received by consumers, investors may become excited and begin buying the stock in anticipation of strong future earnings. This can lead to a rapid rise in the stock’s price.
Uncertainty
Finally, uncertainty can play a major role in stock prices. Investors are often hesitant to invest in a company if there is a great deal of uncertainty surrounding its future prospects. If there is uncertainty about the company’s management, future product launches, or financial performance, investors may be reluctant to buy the stock and this can lead to depressed stock prices.
