Factors Affecting Share Price
Anyone who is considering investing in the stock market will hopefully be aware that the share price of individual companies can go up and down, as can whole sectors of the market or sometimes the whole market can go down in value. There are a large number of factors that can influence the share price of a company.
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The share price of a company is effectively the limit of what an investor is prepared to pay for it. If investors are confident that the stock of a company is undervalued demand will increase and the price will increase until those investors who own the stock feel the price is worth selling for. At this point supply and demand will balance out and the price will stabilize until something happens to convince investors to increase demand again. The reverse of this is where supply is greater than demand and those wishing to sell have to lower their price until demand increases.
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Not all investors study financial reports and some buy shares simply because the prices are increasing and they feel they are bound to increase more. When the prices are increasing like this it is known as a bubble. When the bubble inevitably bursts shares return to a value based on the profitability of the company. A large bubble can affect whole sectors or even the whole market in an extreme case. The reverse of a bubble where investors are selling and prices drop below their logical price is known as a crash. The individual fortunes of a company are mainly measured in terms of the profit it makes and the possibility for future profits. Listed companies have to provide reports of their profits publicly and it is common to see big moves in prices if the reported profits are different to those expected. Other factors that can affect the price include key directors joining or leaving the company, contacts being won or lost and rumors of a takeover or merger.
As well as the fortunes of the individual company, the fortunes of the sector as a whole are likely to affect the price. Investors and the financial press group companies into sectors such as construction or aviation and a change in the demand for their sector or the raw materials and commodities they rely on can move the prices of all the companies in the sector.
Wider economic activity can have an effect on the share price of a company even when it is not directly affected. In a recession when people have less money to spend and are concerned about the risks of investing in the markets the demand for the stock of a company can be reduced which will push the price down. Large nationwide and global events can also cause a similar effect for example when the New York Stock Exchange opened for the first time after 9/11 the whole market suffered its worst ever loss in a day. Natural disasters can also cause drops in share prices as concerns over likely price increases in commodity and raw materials. Government policy and perceived policy changes including upcoming elections can also affect prices where conditions for business are likely to change.
As well as the fortunes of the individual company, the fortunes of the sector as a whole are likely to affect the price. Investors and the financial press group companies into sectors such as construction or aviation and a change in the demand for their sector or the raw materials and commodities they rely on can move the prices of all the companies in the sector.
Wider economic activity can have an effect on the share price of a company even when it is not directly affected. In a recession when people have less money to spend and are concerned about the risks of investing in the markets the demand for the stock of a company can be reduced which will push the price down. Large nationwide and global events can also cause a similar effect for example when the New York Stock Exchange opened for the first time after 9/11 the whole market suffered its worst ever loss in a day. Natural disasters can also cause drops in share prices as concerns over likely price increases in commodity and raw materials. Government policy and perceived policy changes including upcoming elections can also affect prices where conditions for business are likely to change.