When you decide to open a trading account, you are going to start investing right away, but you have to get a clue about stocks and their price trajectory. The way in which prices of stocks are determined depends on whether supply of the seller meets demand of the buyer in the marketplace. However, have you ever considered what the driver of the stock market is? In other words, what factors decide or have some bearing on the price of a stock? Unfortunately, there isn’t any clean equation informing us about how exactly the price of a stock is going to behave. Having said that, we do have an idea about a few things concerning the forces that prompt a stock’s movement to travel upwards or downwards. Such forces fall within three groups: factors of a fundamental nature, factors of a technical nature, and sentiment of the market.
In any stock market that shows efficiency, the prices of stocks would largely be decided by fundamentals, which, at the very basics, refer to a blend of two factors:
1. A base of earnings, like earnings per every share or EPS
2. A multiple of a valuation, like a P/E ratio
An owner who has common stock has a direct claim on any earnings, and the earnings per share (EPS) is the owner's return on investment as they bought stocks at a given stock price. When investors buy stocks, they purchase a share that is proportional in relation to a complete future earnings’ stream. This is the reason for the multiple of the valuation: It is, in effect, the price you are ready to pay for the potential earning stream.
What you should know about fundamental factors determining the shift in stock prices is the perceived risk of any stock. If the risk is perceived as high, prices fall, and vice versa.
If solely fundamental factors had an influence on the stock market, things would be a lot simpler. However, technical factors have key roles to play in price moves. They represent the mix of conditions that externally change the supply of, and demand for, any company's stock. Some of these conditions indirectly influence fundamentals. For instance, indirectly, economic growth contributes to growth in earnings.
When you open a trading account, and you are enthusiastic about trading, technical factors constitute such factors like inflation, where low inflation sees stock prices rising, and deflation (in which companies’ values fall). Such technical factors may curb aggressive investing during such conditions. Additionally, the stock market deals with companies’ stocks, and prices tend to draw a parallel with other companies in similar sectors and peers in the same industries.
Market sentiment is nothing but the way the market behaves. Furthermore, it’s not the market’s behaviour that counts, but that of its participants, both in an individual way and collectively. Sentiment in the stock market can have an effect on the price of stocks. Sentiment is most often biassed, subjective, and plain obstinate. For instance, you can make a strong judgement call about a given stock's future potential growth. The future may likely fall in line with your predictions, but in the meanwhile, the market may have a myopic view, dwelling on news that maintains the stock at an artificially high price or low price.
Different investors depend on various factors. However you wish to invest, you have to take influencing variables into account and solid brokers like Motilal Oswal can help you do this. Your first step in investing would be to open a Demat account and then, with an array of resources, you can easily learn what drives prices.
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