Like any other market, stock prices respond to market forces of demand and supply. The stock prices respond to day to day changes in demand and supply from buyers and sellers. For instance, if there are more people who want to buy stock compared to those who want to sell, the price will move up. When the market gets flooded with sellers compared to those who want to buy stock, stock prices will fall. Thus, the changes in demand and supply are what we call market forces.
Earnings are the most important factor determining the company’s stock prices. Earnings reflect the profit the company is making. If a company does not make profits, it may operate in the short run but it will not continue operating in the long run. The law states that public companies should report their earning 4 timers per year. So, the figures reported will tell investors whether the company is doing well or not. You will notice that prices of shares will typically change around the time that earnings are reported. It may also change immediately after declaring the earnings. If the earnings improve, you should expect the share prices to go up. Also, when a company reports losses, the share prices will go down.
Prices of shares change with reported earnings. This is because of the fact that most analysts rate companies based on its profit. For instance, if the company’s results are better than what we expect, the prices of shares will jump up. Also, if a company registers disappointing results, the price of its shares are likely to fall.
During the dot-com era, plenty of internet-based companies increased their market capitalization. The prices of their shares rose even though this was a temporary move. Later the value of the companies shrunk but the prices did not move much. It shows that there are plenty of other factors that influence the change in the prices of shares. The time and era are among the factors.
In most cases, the prices of stocks for companies in the same industry move in the same direction. The reason is that companies that operate in the same area face similar market conditions. So bad news about a particular industry will affect the price of stocks of all companies in that industry.
If investors level of confidence in the company increases, it is bound to cause changes in prices. The prices of the company’s shares are likely to increase. If their sentiments go down, it is likely to make the prices go down.
Bullish or Bearish Market
When the market becomes bullish, most stock prices rise in unison. This leads to growth in the investors’ confidence. It brings optimism in the market making the prices to rise even further. Also, a bearish market will see the prices fall and the level of confidence will start fading. If the economy is in a recession, it results in high levels of unemployment. Also, a recession will further affect the prices of the shares.
Factors such as interest rates will either stimulate or stagnate the economy. If the rates are favorable, companies will access credit. They are able to expand and become profitable. This will have a positive effect on the prices of the shares. But when the interest rate is too high, it makes credit expensive. This reduces investment opportunities making the companies less profitable. It may result in a dip in share prices. When the market rates are high, most investors will opt for other forms of investment. They will not invest their money in stocks. The effect is that the stock market gets starved of cash forcing the prices to fall.
If there are signs that the economy will expand, prices of shares are likely to rise. The reason is that investors become optimistic that they will make more money in the future. But if the economic outlook is bleak and uncertain, investors offload their shares. And will not buy more shares. It leads to a fall in prices of shares as more people flood the market trying to sell the stocks.
The Occurrence of a Economic Calamity
Economic changes around the world are likely to affect world economies. They also impact on stock prices. For instance, an act of terrorism is likely to lead to an economic meltdown. It will result in falling share prices of many companies, especially in the tourism sector.