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If a student fails an exam, then surely he/she checks the exam copy to know where and why his/her marks had been cut.
Then why don’t we as a student of the stock market look for the reasons that can affect our investments which depend on the movement of stock prices?
Do you want to know the factors that affect stock prices? If yes, then this crisp article is for you.
When I was researching the topic, I got to know about tonnes of factors but all of them were not what I was looking for. After making a long list, I selected 7 of them and we are going to discuss them today in depth.
So, without any fluff let’s know the different factors affecting stock prices.
List Of The Factors That Affect Stock Prices
Before getting into the topic, there is a thing I want to tell you. People often get confused between the terms factors that affect stock prices and factors that affect the stock market. There is no difference between them.
The same factors that move the prices of shares are the ones that affect the stock market also. As if the share prices are getting affected, the stock market will eventually suffer. Cleared!
Now the factors:
1. Supply and Demand
This is the most basic factor that affects share prices. The imbalance between the supply and demand for a particular stock can wobble the share price.
The supply of the shares is limited as the number of tradable shares (i.e. Outstanding Shares) remains the same unless the company issues new shares.
Now, what about the demand?
If the buyers in the market don’t want to buy shares of a company, but the sellers want to sell, then what do you think will happen? The stock price will go down. And if buyers are dying to buy the shares but sellers are not selling those shares, then in this condition, the share price will increase.
In the end, it all comes down to bargaining as it happens with any other commodity.
If a company shows growth or failure for a quarter or a period, the stock price will also move accordingly.
If a company’s revenue has increased or it launched a successful product in the market, the stock price will surely go up. And if in its annual report or financial statements, the company failed to achieve the profit mark, the share price will surely go down.
So, this is how financial statements, annual and quarterly earnings reports, launching of products, and revenue performance act as the factors that affect stock prices.
3. Different Policies
Policies by the government, RBI, and SEBI also impact share prices. How? Let’s understand one at a time.
- Government Policies
Policies by the government affect the economy and the businesses of the country. If the govt. issues some guidelines related to an industry or sector, the stocks of that sector unquestionably show movement.
Thematic stocks or sector stocks get affected by government policies easily.
- RBI Policies
The Reserve Bank of India is the apex bank in India. It changes the interest rates for the banks for various reasons like to stabilize the economy or to control inflation.
Let’s say, one day, RBI raise the interest rates for banks i.e. REPO rate, now banks will also increase their lending rate as they have to pay a high-interest rate to RBI.
Businesses also take loans from the banks, so they also need to pay higher interest, which will decrease their profit in turn. And eventually, this reduction in profit or revenue will decrease the share price of the company.
- SEBI Policies
From time to time, SEBI releases notifications regarding trading. A recent example is a change in the margin rules. These guidelines and notifications affect traders, more than the investors, as the traders remain active in the market, not the long-term investors.
4. Investors’ Sentiments
Either news, rumors, or lack of knowledge prompted most retail investors, like us, to buy or sell the shares.
If there is news came out about a particular company, its stock price move in the north or south direction depending upon whether the news is positive or negative.
Talking about lack of knowledge, let’s say, if a company announces a stock split, it is sure that the share price will reduce by a certain factor as a result.
But most investors think that the share price is going down because of other reasons, maybe the poor performance of the company or something like that.
And because of this, they start selling the shares (if they have that stock as shareholding). This is how lack of knowledge also acts as a factor that affects stock prices.
5. Natural Disasters
From the disasters like earthquakes and floods, the assets and property of the company also get destructed. Because of these losses company has to invest the capital to build or buy new assets and the capital spent counts as an expense on the balance sheet of the company.
The increased expense will result in lower profit and that is a financial loss for the company. And if the company is at a loss, you know what happens: share price goes down.
We all have experienced, what COVID has done to businesses. (Many of us still don’t know whether the CORONA Pandemic was natural or…) By the way, the pandemic was a disaster for us and we have seen the stock market crash.
So, natural calamities = losses = effect on share prices.
6. Country’s Economy
Have you heard of Cyclical Stocks?
They are the stocks or companies whose performance depends on the economy of the country i.e. stocks that depend on the cycle of the economy are known as Cyclical stocks.
In good economic times, these companies perform well, but in a bad economy, they just…stop. And according to the economy’s trend, their share prices also move with the trend.
Stocks in the Airline industry or Travel companies, move up and down with the economy.
Now, there are so many reasons, why the economy sometimes goes up and sometimes down.
Think about Inflation. Think about GDP. And many such terms.
7. Currency Conversion Rate
The value of one nation’s currency in terms of the currency of another nation is known as the ‘Currency Conversion Rate’ or more generally, the ‘Exchange Rate’.
1 dollar is equal to 77 rupees (as of writing this article). So, the Dollar-INR exchange rate is 77. Simple, isn’t it?
Let’s say, the value of the Rupee starts to increase which means the Indian currency will strengthen. When the Rupee strengthens, the number 77 ($1 = INR 77) will start decreasing. Let’s say from 77 to 76 to 74 to 70, and so on and so forth.
Suppose, Company A exports its product for $1. Earlier it was getting 77 rupees, but now when the rupee comes to 70, the company is only getting 70 rupees i.e. 7 rupees less than earlier. And this is how Company A will suffer losses.
Now, take another company, Company B, that imports goods to manufacture its products. Earlier it was paying 77 rupees for the $1 goods it was importing. Now, the company is paying only 70 rupees, i.e. 7 rupees less. After the Rupee strengthens, Company B will be in profit.
So, Company A is facing losses as its expenses have increased. Hence, its share prices will go down.
And Company B’s share price will move upward as it can reinvest that saved money in the business.
Frequently Asked Questions (FAQs) about Factors that Affect Stock Prices
Conclusion
Supply and demand is the most basic factor that affects stock prices. But other than that, there are factors like the sentiments of investors, economic performance, inflation, and policies by different entities that also affect the share prices.
These factors don’t just affect the stock market of a particular country, but the stock markets all over the world. The reason is globalization.
Having knowledge of the different factors that affect share prices, can help an investor to make decisions while investing.
Do you think that besides the aforementioned seven factors, there are any more factors that affect the share market? If yes, then comment below, and let the other fingossipers know about them. And also, if you are confused with any point, comment on that question too.
Happy learning!
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