How Stock Prices Are Determined?

Several other factors like company’s overall performance, government policies, global events and investor sentiments also influence the price of a share price.

1. Demand and Supply The stock market works like any other market.

• If more people want to buy a stock than sell it, the price will go up.

• If more people want to sell than buy, the price will go down.

For example, if many investors have conviction that a giant like Infosys or Reliance Industries will grow and earn higher profits in the future, they will tend to buy more shares. This increases demand and automatically pushes the stock price higher. If there is negative news surrounding a stock, people may try to sell and the price falls.

2. Company Performance A company’s own performance strongly affects its share price. Investors look at quarterly results, profit growth, revenue, new projects and the company’s long-term plans.

• If a company reports good profits, the share price usually increases.

• If profits fall or if the company faces losses, the price can drop.

In India, when renowned companies like TCS or HDFC Bank announce good results, their share prices rise quickly on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

3. Economic Conditions in India

The state of the Indian economy also affects stock prices. When the economy is growing, more businesses make profits, jobs increase and people spend more. This leads to more confidence in the market and share prices tend to rise.

Important economic factors that can move stock prices include,

For example, if the Reserve Bank of India cuts interest rates, borrowing becomes cheaper for companies and consumers. As the borrowing has become cheaper, companies can expand with less expenditure (on interest) and consumers can avail loans at better prices. This phenomenon boosts stock markets as overall production and consumption have increased.

4. Government Policies and Regulations

Government actions in India have a strong impact on stock markets. Schemes like ‘Make in India’, changes in taxation or reforms in sectors like energy, banking and telecom can influence investor behaviour.

If the government announces a policy that helps a particular sector, the stocks of companies in that sector may rise. For instance, if the government provides support for renewable energy, companies in solar or wind energy may see a price increase in their shares.

5. Global Events The Indian stock market is connected to the global economy. Events in the USA, Europe, China or the Middle East can affect prices in India.

Examples of global factors include

• Crude oil prices

• US Federal Reserve interest rate decisions

• International conflicts

• Global recession news

Most of the crude oil India consumes is imported. So, if global oil prices rise sharply, Indian markets often react negatively and many stock prices fall.

6. Market Sentiment

Sometimes, stock prices move not because of facts but because of how investors feel. This is called market sentiment. If investors feel positive or hopeful, prices rise. If they feel fearful, prices fall. Sentiment is affected by news, social media discussions, expert opinions and overall market trends.

7. Foreign Investor Activity

Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) play a major role in the Indian stock market. When they buy heavily, stock prices rise. When they sell and pull out money, the market often falls. This is one reason why the Indian stock market sometimes sees sudden movements.