An important question which arises in the mind of an investor is mainly related to why there is a constant fluctuation of prices in the market. There are many different reasons for this and the price of a share varies depending on certain factors.
What is the demand and supply equation in the share market?
The prices of shares change because of the demand and supply that may be present for a particular stock.
When there is a higher level of demand for a stock than the supply, the price rises and if there is low demand present for a stock with high supply, the price falls.
This creates a push-pull effect which is dynamic in nature.
The main theory that most investors claim to believe in is that the movement in price of a stock indicates the worth or value of the company.
The value shouldn’t be determined by the stock price but by the market capitalization which is basically the outstanding shares multiplied by the stock price.
Overall, it can be stated that demand is the main driver of the prices for stocks when it comes to the fundamentals and whenever the demand exceeds supply, the stock price goes up.
What are the factors that affect the share prices?
This is basically where the main reasons as to what exactly drives the demand or supply to increase or decrease are taken into consideration.
The factors are,
Factors related to the Company –
Shares are units of equity ownership interest which are present within a company. If there is any impact on the company whether it is negative or positive, it can change the price of the stock and make a big difference.
Company related factors can also be announcements which may have information of the profits and the earnings of the company and their forecasted plans that have been set up for the future.
When dividends are declared by companies, the share price is impacted and mergers as well as takeovers also play a role in changing the price of the stock.
If there is any alteration or change when it comes to the management of the company, or any scandals paint the company in a bad light, it could affect the price of the stock heavily.
Demand can be generated with positive announcements and the price also goes up this way.
When new products are launched under the company, it gives a good advantage and helps prices go up.
Factors related to trends in the Market –
When it comes to trends that are present in the market, there are two main phases that cause the stock market to fluctuate.
This is Bull and Bear.
- The Bull trend is where higher investments are done to increase the stock price and this results in investors having a better level of confidence in the economy.
- The Bear trend is where investors are uncertain about the market conditions involved and the future of the stock market becomes a concern to them. For example, in the current pandemic, the economic situation was highly unpredictable. This simply ends up causing the prices to fall.
Factors related to the Industry –
Different products can be bought based on the needs that people have. It’s completely based on their personal preferences and this can cause the prices to rise or fall.
If we take an example, If a very cheap laptop was launched, there could be a surge in the purchase of this product but there may be individuals who would want to buy laptops that may cost more.
When the working of businesses in one particular segment in the market increases, there is an improvement that is seen in that entire sector and vice versa which causes prices to fluctuate.
Economic Factors –
The different factors causing price fluctuations which are dependent on the economy in one way or the other are,
GDP –
The GDP or Gross Domestic Product is the total amount of goods or services that is produced by an economy as a whole. The health and the position of the economy can be shown through the GDP.
When the GDP growth is strong, it is a major indication of a better, positive outlook for the economy where the earnings are doing well. Here, investors are confident and there is a surge in the stock market that is noted.
Geopolitical Factors –
When it comes down to macroeconomics, it is the study of the behaviour of the economy as a whole while considering the different factors that play a role in affecting the population.
When there is a situation which hinders the ability of the country to produce and sell goods, it could cause issues and damages that would need time and money to fix or repair.
Elections that are coming up, wars, natural disasters and other macroeconomic factors can make a huge impact, causing the stock markets to fluctuate and become very volatile.
Microeconomic Factors –
Microeconomics is the study concerning separate individuals or companies because of the various factors which impact them.
The entire economy is not considered or looked into and some of the microeconomic factors that are important are, availability of distribution channels and manpower, investor availability, the competitive nature present and much more.
It helps make an estimation on how a specific company is doing irrespective of whether the entire economy is growing or doing well.
Inflation –
This is where over a period of time, there is a surge that is present in the prices of goods and services. When inflation is high, investments are not recommended as the spending power available for investors decreases.
The consumer price index (CPI) is used to measure retail inflation and this helps figure out the average living cost in the economy. This basically means that individuals will need to ensure that their income grows to keep the same standard of life that they are normally used to.
It is important to understand that every stock purchase is not the same as the others and there will be variations and fluctuations in the price due to various conditions or factors that are ultimately very hard to predict.
The factors that affect the share price can help form strategies and in making informed decisions on where individuals can invest their money.
A commerce graduate who is on a mission to educate people about investment and personal finance.