The Dynamic World of Stocks: Why do Their Prices Change?
Summary:
Stock prices continue to change with changing industry practices, economic conditions, political scenarios, and financial performance of companies. There is a variety of different factors that cause price fluctuations in the stock market that investors must be aware of.
You may wonder why stock prices change every second. There are a wide variety of factors that are responsible for this fluctuation. Financial performance of the company, latest news, events, economic conditions, investor sentiment and market trends are some of them. Investors and analysts keep a close tab on the stock prices as it is essential to assess a company’s financial health. Making an informed investment decision means understanding all the possible outcomes and ensuring the most favourable one. This is why investors study price movements closely. This blog will provide an overview of why stock prices fluctuate as much as they do.
What are stock prices?
A stock price or a share price refers to the current market value of a single share of a publicly traded company’s stock. In simple words, it is the price at which an investor can purchase or sell that single share of the company’s stock on an exchange platform or in the open market. It is essential that you know that share prices move every few second. This is mainly because of the supply and demand equation.
Why is the supply-demand equation important?
Stock prices are determined by the supply and demand dynamics. You can say that demand and price are directly proportional to each other. If the demand goes up, so will the price. Conversely, if the demand falls, the price will fall too. One of the biggest reasons why stock prices fluctuate so frequently is because demand keeps changing.
Which factors cause changes in stock prices?
Let’s understand how stock prices change constantly and exactly what is responsible for these fluctuations.
Highs and lows in market trends
Two of the most commonly used terms in the stock market are bull and bear trends. These trends or phases represent a potential fluctuation in the stock market.
| Bull phase | Bear phase |
| Here, investors anticipate a promising growth in the future. They invest more resulting in a rise in the stock prices across all sectors. | Conversely, investors are walking on eggshells in this phase, meaning they are uncertain about economic growth. The COVID-19 pandemic is an excellent example of a bearish trend where stock prices fell across all sectors. |
Company-related news and updates
A share or a stock provides investors ownership in the company. So, anything that happens in that company, be it positive or negative, is going to affect their stock prices. This includes:
| Company-related factors | Impact |
| Earnings reports and annual reports | Company announcements associated with their financial performance provide valuable insights to investors. Often investors use this data to predict future movements. |
| Dividends, rights, bonuses, and payments | Dividends are small payments distributed by large corporations to shareholders only to hold their stock. If a dividend-paying company decides to pay out a much lower dividend or announces it will no longer pay out dividends, the stock prices are more likely to fall. On the other hand, investors invest after the company announces a dividend to profit from it when it is finally paid out. This cases the stock prices to increase until the time the dividend is paid out. |
| News release on product launch and mergers | A positive news will typically prompt investors to buy stocks. For instance, an update regarding a new product launch or a corporate acquisition will cause stock prices to rise as more and more investors will be interested in the company. |
| Changes in company management | A company with a strong management team attracts more investments, keeping stock prices on the higher side. So, any changes in company management can have an impact on the stock prices. A good change will work positively however a negative change may not be fruitful for investors. |
| Employee layoffs | Company layoffs and restricting can be both good and bad. Sometimes, it indicates a company’s effort toward making their balance sheet stronger and more attractive. Also, various businesses belong to cyclical industries, meaning these companies go through phases of massive demand and poor demand. This compels them to lay off employees. |
| Scams and scandals | If a company’s name gets caught up in a scandal, it can be very harmful to their overall image and financial health. Investors may prefer to withdraw their investments and would not want to jeopardise their growth. |
Industry-related factors
These factors can have a positive or negative impact on the share prices. Say, the government of India announces a production linked incentive scheme for automobiles. It is going to encourage automakers across the country and boost share prices in the industry. It will automatically attract investors and onset a cycle of good production, good demand and good stock prices. In a different scenario if one player within an industry comes up with a product/service that is more appealing to consumers, it will lower demand for other products thus reducing the stock prices of competitor companies.
Economic factors
There are several economic influencers causing the highs and lows in the stock prices. They include:
| Economic factors | Impact |
| Geopolitical factors | This includes macroeconomic factors including geopolitical events, civil unrest, elections and natural disasters that may affect a company’s performance. For instance, in case of situations like war or an earthquake, a country loses substantial amounts of resources which then affects production and distribution of goods. Moreover, infrastructure-related damage also fractures the financial performance of many companies resulting in a crash in the stock prices. |
| Microeconomic factors | Spending power of the customers of a certain company, access to manpower, availability of effective distribution channels and competitiveness are some of the microeconomic factors that determine the outlook of stock market. Consumer income is also a key microeconomic factor that plays a detrimental role in a particular stock’s performance. |
| Inflation CPI | CPI is the consumer price index that evaluates retail inflation. It gathers data associated with price changes in the most common goods and services and then assesses the average cost of living. Basically, CPI represents the spending power of an individual. If inflation rises, prices of goods rises and if the income fails to increase parallel, then spending decreases. As a result, performance of several companies takes a toll, negatively influencing respective stock prices. |
| MPC interest rate | MPC stands for the Monetary Policy Committee of India and determines the borrowing/lending rates in the country. If the borrowing rates surge, companies incur higher debt expense, resulting in fewer capital for growth and expansion. This can affect the company’s future and reduce share prices. |
| Gross domestic product (GDP) | GDP refers to the total amount of goods/services produced by an economy. A strong GDP is where businesses report good earnings showcasing a positive economic outlook. Investor confidence is high and stock markets grow. |
Guiding you through the volatile stock market
Stock markets are volatile and what makes them so is the stocks. Prices of these stocks are affected by a myriad of different macroeconomic and microeconomic conditions. Hence, it is key to study price movements, trends, stocks and the companies that those stocks belong to. In a world where stock prices change every now and then, you need to realize the factors that cause these fluctuations. All the new investors out there, learn the basics and equip yourself with all there is to know about the stock market.
Check out some of the most volatile stock in India.
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