While trading on the stock market, investors should know that each stock has a price attached to it. A feature of any stock market is the fact that prices of stocks may change constantly. Market volatility is a key factor to consider while you are investing in the stock of a particular company. Knowing how stock prices are determined may help investors to understand the factors that influence stock price movements, and in turn, their decisions to invest in particular stocks. Some key factors that play a part in the price determination of stocks are highlighted in this article.
Supply and Demand – Always Important
The factors of supply and demand play a large role in determining stock prices. In the stock market, the per-share price of any stock is largely decided by how much people want to invest in it and whether there is enough of that stock available. Typically, a stock will rise in price if the demand for it exceeds the supply of it, and vice-versa.
However, supply and demand for any stock are also influenced by underlying factors. This begs the question of why the demand for a specific stock increases in the first place. If say, the stock of a cement company is not too high on a particular day, and the next day there is an optimistic media report of the government boosting infrastructure and spending in the country. Investors may find that, after the publication of the report, cement stocks increase in price. The positive outlook that has been triggered by the news report has affected market sentiment and more investors want to buy cement stock. Similarly, pessimism about certain sectors may bring down company stock prices in those sectors due to low demand. While supply and demand are key factors driving prices, prices in the online share market are also dictated by other factors.
Stock Price Determination – Different Factors
Supply and demand are significant when it comes to stock prices but other factors also count. Here are some other factors that have a lot to do with stock price determination and consequently, fluctuations in stock market prices:
- Inflation
Perhaps among the most relevant determinants of stock prices, inflation occurs when the overall cost of goods and services increases. This actively reduces the buying power of consumers and businesses alike. Consequently, if inflation soars, investors may become afraid and start selling their stock. On the flip side, if the rate of inflation decreases, investors tend to be more optimistic about the overall economy and buy stock. Also, related to companies themselves, rising inflation may result in a company’s poor performance due to a surge in the cost of expenses that interfere with the profitability of the company. Hence, the stock appears less attractive and investors stay away, and the stock price falls.
- Company Operations
While trading in the online share market, investors often consider the activity within any company to decide how its stock price will behave. Company circumstances may enhance or hinder stock prices. Say, if a company declares a profitable performance, the stock may rise in price, but if it reports, say, a change in management, its stock price may decline based on investor confidence.
- Interest Rates
Companies borrow money for different purposes and high interest rates could increase a company’s expenses, making it spend more. In turn, this means a decline in its stock price as borrowing high could mean a loss in corporate earnings.
- Other Determinants
The general economic conditions and economic outlook of a country play substantial roles in deciding how stock prices will rise or fall. If the performance or outlook of the economy is bleak, investors may want to spend less and stay away from the stock market, making stock prices fall. If the future of the economy appears positive, investor spending may take stock prices higher due to increased demand.
Apart from any country’s economic condition, broader global events also shape the way stock prices are decided. Unrest in the world due to wars or natural calamities may deter investors from buying and this could bring stock prices down.
Stock Prices and Investing
Stock prices tend to fluctuate quickly, sometimes in seconds, and the online share market can show extremes in volatility. This results from rapid trading activity that influences stock prices. Investors should know the reasons for stock price shifts and the determinants of stock prices for their investment decisions to be potentially fruitful.
