Whether you are just starting your stock market trading journey, or whether you’ve been an active market participant for years now, you will no doubt be aware that stock prices change a great deal every single day. In fact, it is this very aspect that attracts many investors and traders to the markets. The changes in prices can be used to generate profits for savvy investors.
But have you ever wondered why stock prices change? If this is something you’ve been curious about, you’re about to find the answer to the questions on your mind. Check out the top factors that cause stock prices to change.
Demand and supply are the top factors that can drive stock prices up or down. This is because at the end of the day, the stock market is also just a market. Stocks with greater demand may witness a rise in the prices, while stocks with an inflated supply will witness falling prices.
Over time, the proportion of demand and supply tends to fluctuate, leading to price movements in the market. There is no easy way to predict the demand and the supply for a stock, but you can view the typical demand and supply for stock during a given trading day on your trading portal, using the bid and ask figures.
The demand and the supply are, in turn, affected by various factors. These factors indirectly affect the prices of stocks by influencing the demand-supply equation. Top among these are the internal metrics of the company. Some of these factors can have a positive effect on the prices of the company’s stock. These aspects include good financial performance, dividend declaration by the company and the launch of a successful product or service.
On the other hand, some company-related factors can drive down the price of the company’s shares. Examples of these metrics include scandals or scams involving the company, major layoffs or poor management performance.
Apart from developments within the company itself, the way the industry performs is also important in deciding the price movements of a company’s stock. If the industry performs well or receives any favourable news, the stock prices of all the companies belonging to that industry tend to benefit from these developments.
For instance, subsidies announced by the government or a boost in the overall demand for the industry’s products or services have a positive impact on the companies in that industry. But falling demand, eroding customer base or other such negative developments have an adverse effect on the stock prices.
Moving beyond a particular industry and taking a look at the market itself, there are broad trends that affect the prices of stocks of every listed company. Market phases or trends can be bullish or bearish. Bullish phases have a favourable impact on the prices of stocks in general, while bear markets witness falling stock prices.
Typically, in a bullish market, investors are optimistic about the future and therefore drive up the demand. As you may have guessed, this, in turn, drives up the prices of stocks. But in bearish market phases, investors tend to offload their holdings, leading to falling stock prices in general.
The stock market is not a separate entity. It is invariably linked to various national and international developments. And geopolitical factors, whether within India or across the globe, can significantly influence market prices either way. Some common examples of geopolitical developments or incidents that can impact the prices of shares include elections in a country, civil unrest, war and even natural disasters.
All these developments tend to drive investor sentiment either upward or downward, leading to increased market activity. Needless to say, favourable geopolitical events lead to an increase in prices, while adverse events can pull the prices downward.
You may think that interest rates in the economy have no correlation with your online trading decisions, but the truth is quite different. Every quarter, the Monetary Policy Committee (MPC) revisits the interest rates in the economy. An increase in the interest rates makes borrowing costlier.
So, companies with a significant portion of debt in their portfolio tend to suffer, and sensing this, investors may not consider them good investments. This could negatively impact the stock prices of such companies. On the other hand, companies with lower debt financing may witness a positive growth in the prices of their stocks.
Investor sentiment is extremely sensitive to all of the factors outlined above. A small development in a company’s industry, in the geopolitical arena or in the interest rates can have a big impact on how investors view the near future of the markets. If investors suspect increased volatility or the start of a bear market, for instance, they may tend to panic and withdraw their investments, leading to falling stock prices.
Similarly, if they deem the economic condition to be good, or if they are hopeful about the future, they may flock to the markets instead. This, as you may have guessed, can cause stock prices to increase.
These factors are only some of the many aspects that influence stock prices from time to time. As you can see, most (if not all) of these factors are well beyond your control. So, pay attention to these parameters before you get into stock market trading. That way, you will be able to make more objective trading decisions.
To start your stock market trading journey, you need a demat account in your name. With Motilal Oswal, you can open a demat account almost instantly, through a simple and paperless process. Visit the website and open your account today, so you can use these insights to trade smartly.
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