Buying Shares – Chapter 4: What affects ‘Stock Prices’?

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Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 4 out of 19. Read the rest: Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1:

Buying Shares – Chapter 4: What affects ‘Stock Prices’?

This is chapter number 4 out of 19. Read the rest:

Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1: Introduction
Read Buying Shares – Chapter 2: What are Stocks and Shares?
Read Buying Shares – Chapter 3: Different Classes of Stocks

Stock prices are constantly changing due to outside factors. Stock prices vary because of supply and demand. If a large number of people want to purchase a stock, meaning there is a high demand with the goal of selling it, then the price moves up. On the contrary, if more people wanted to sell a stock, meaning higher supply, than buy it, then demand is considered low, and the price would fall.

Supply and demand is a simple concept to grasp. What is more complicated to grasp though is, what makes people favor one stock and dislike another stock? This comes down to finding out what is going on behind the scenes at the company, and if this will be negative for the company or positive This is pretty speculative though and almost every investor has different sentiments to different pieces of news or company developments.

Below is a table showing short term and long term effects on the stock price.

Affects on stock prices:

In the short term

Company releases earnings report;

Earnings have risen -> price goes up

Earnings have sunk -> price goes down

Earnings have sunk less then predicted -> price may rally

Company gets press coverage

Positive coverage -> price goes up

Negative Coverage -> price goes down

Company makes announcement ie. change of staff, new product release, possible takeover affecting price either way.

Speculation and rumors on company abound affecting price either way

In the long term

Projected earning are released

Earnings set to rise -> price goes up

Earnings set to sink -> price goes down

So the value of a stock doesn’t only reveal a company’s present value; it also reveals the expansion that investors anticipate in the future.

Public companies need to publish their profits on a quarterly basis. Investors inspect these reports closely- this is referred to as ‘earnings season’.

Obviously, as you see in the table above, there’s more then just earnings that can move sentiment on a stock and in turn its price. Let’s look at that infamous dotcom bubble again. Loads of hi tech and start up companies were springing up all over the place. Most of these start-ups were not capitalized at a profit, yet their share prices went through the roof. These stock appraisals did not hold for long though, and the majority of these companies saw their valuations shrink to a tiny proportion of their highs. Still, the fact that prices did move that greatly shows that there are things than existing earnings that can control stock prices.

Investors have developed many ratios and indicators to try to predict patterns in the movement of stock prices such as price/earnings ratio. This ratio is calculated as follows:

=(Market Value per Share)/(Earning per Share)

So the question is: why do stock values vary? When it comes down to it, no one really knows which way and by how much a stock will move. Some believe that it isn’t possible to predict how stock prices will vary, while others think that by looking at past price activities, you can form a trend and decide when to buy and sell. The only thing we do know is that stocks are unstable and can change in price very quickly.

The most important considerations to take into account about this subject are the following:

1. At the most basic level, supply and demand in the market affects stock price.

2. Price multiplied by the number of shares outstanding is the overall worth of a company. Associating just the share value of two companies gives no real idea of the company worth.

3. Earnings are not the only factor that moves stock prices. Remember, it is investors’ sentiment and expectations that eventually affect stock prices.

4. Sadly, there is no single theory that can explain exactly how stocks move.

About the Author

FX Empire Editorial Boardauthor

Table of Contents

Intro

Intro