Forces that move stock prices By David R.
Forces that move stock prices By David R. Harper Updated August 5, — 8: Stock prices are determined in the marketplace, where seller supply meets buyer demand. But, unfortunately, there is no clean equation that tells us exactly how a stock price will behave.
That said, we do know a Factors affecting share price things about the forces that move a stock up or down. These forces fall into three categories: Fundamental Factors In an efficient market, stock prices would be determined primarily by fundamentals, which, at the basic level, refer to a combination of two things: When you buy a stock, you are purchasing a proportional share of an entire future stream of earnings.
It is the price you are willing to pay for the future stream of earnings. Part of these earnings may be distributed as dividendswhile the remainder will be retained by the company on your behalf for reinvestment.
We can think of the future earnings stream as a function of both the current level of earnings and the expected growth in this earnings base. To learn about present value, see " Understanding the Time Value of Money. Many argue that cash-flow based measures are superior. For example, free cash flow per share is used as an alternative measure of earnings power.
The way earnings power is measured may also depend on the type of company being analyzed. Many industries have their own tailored metrics. Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.
About the Valuation Multiple The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are: The expected growth in the earnings base The discount ratewhich is used to calculate the present value of the future stream of earnings A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple.
What determines the discount rate? First, it is a function of perceived risk. A riskier stock earns a higher discount rate, which, in turn, earns a lower multiple. Second, it is a function of inflation or interest ratesarguably.
Higher inflation earns a higher discount rate, which earns a lower multiple meaning the future earnings are worth less in inflationary environments. In summary, the key fundamental factors are: Some of these indirectly affect fundamentals. For example, economic growth indirectly contributes to earnings growth.
Technical factors include the following: We mentioned inflation as an input into the valuation multiple, but inflation is a huge driver from a technical perspective as well. Historically, low inflation has had a strong inverse correlation with valuations low inflation drives high multiples and high inflation drives low multiples.
Deflationon the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies.
To learn more, read " All About Inflation.
Company stocks tend to track with the market and with their sector or industry peers. For example, a suddenly negative outlook for one retail stock often hurts other retail stocks as "guilt by association" drags down demand for the whole sector.
Companies compete for investment dollars with other asset classes on a global stage. These include corporate bondsgovernment bonds, commoditiesreal estate and foreign equities.
The relation between demand for U.Understanding external factors affecting share market acts as a tool that investors must use to time the market. This gives an investor an added advantage as not many people has this skill. Internal factors affects share prices in a more direct way. Factors Affecting Share Prices What are the major factors that affect share prices in the stock market?
This is one of the most frequently asked questions by stock market participants. Important factors influencing share prices The following are the factors that influence share prices 1.
Demand and supply Demand and supply of securities influence price of securities.
If the demand of securities is more than the supply (buyers are more than the sellers), prices of securities increase. On the other hand if the demand of securities is less than the supply (buyers are less than.
Even though many factors influencing, company specific variables such as earnings per share, firms book value, A study on the factors influencing stock price A Comparative study of affect the market price of the share in the positive direction.
Factors Affecting Share Prices September 28, by Rajandran Leave a Comment Like any other commodity, in the stock market, share prices are also dependent on so many factors.
2 Disclaimer for presentations This presentation is intended to provide a general overview for information and educational purposes only and is not a comprehensive treatment of the subject matter.