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Stocks and shares are the most common ways to invest in the markets. A stock is an ownership proportion of a company, or a group of businesses, whereas a share is one individual ownership unit in a specific company.
Investors who hold stocks in their portfolio may have invested in multiple shares across numerous companies. In contrast, a shareholder owns a designated proportion of one defined business.
Countless factors determine stock and share prices, including market sentiment, investor confidence, technical indicators, supply and demand, historical price performance, and economic climates.
Table of contents
- Fundamental Factors That Affect Stock And Share Prices
- Technical Factors That Influence The Market Value Of Stocks and Shares
- Other Influences On Stock And Share Prices
- What Impacts The Value Of Stocks And Shares FAQ
- Related Information
Fundamental Factors That Affect Stock And Share Prices
Fundamental analysis is a process investors use to try and time positions or trades to maximise profitability. Based on the earnings available and the stock’s valuation, stock prices are affected by fundamental factors.
Most traders use a price-to-earnings ratio to value a stock and calculate potential earnings as earnings per share, or EPS.
Therefore, investors need to know what a stock will cost and how much profit they stand to make before deciding whether the investment provides favourable returns and is worthwhile.
Share earnings are usually paid as dividends. The company calculates the net profit after the end of a trading period or year and divides this between shareholders based on the number of shares owned.
Companies can retain profits within the business to reinvest in things like upgrading machinery, expanding to new geographical areas, or new research and development activities. Eventually, reinvested profit should be advantageous since it increases the company’s potential profitability in the future – but it also means less immediate returns in the form of dividends.
Fundamental analysis of the underlying financials of a company or companies linked to the stock or share is important, as this data can highlight the following:
- Weaknesses in financial performance
- Lack of liquidity or stability
- Successful historical price performance
Once investors understand the business’s financial performance, they can assess the likelihood of a downward price spiral or the possible gains to be made.
Technical Factors That Influence The Market Value Of Stocks and Shares
Technical factors are varied and include several external elements that can impact supply and demand.
Investors discount share price forecasts to account for inflation and the wider economic climate. External influences include economic slowdowns or growth, interest rates, government policies and political events that are likely to make stocks and shares more or less attractive.
Low and high inflation
Generally, high inflation causes stock prices to fall because lower consumer spending means less revenue for companies and less growth in sectors and the wider economy. However, moderate inflation can be positive because it reflects rising profits, increases in stock prices, and steady economic growth.
Low inflation is often linked to low-interest rates, which means companies can see share price gains due to increased spending and lower borrowing costs. Still, it is normally best for stocks with lower, although more sustainable, dividend pay-outs.
Broader industry performance
Most stocks and shares track the market to an extent where the success or failure of large parts of the sector or peers within the industry can have an impact – even if the company itself has not been affected.
Investors often analyse the market and sector movements alongside a company’s financial performance to try and assess potential price changes.
A collapse of a major player within one industry could be both good or bad, depending on the cause and whether material scarcity, lack of demand, or political factors mean the same future is likely for other companies trading in the same business space.
Stock and share prices can also change because of things that have little to do with the stock’s intrinsic value. Examples include insider trading, or where an institutional investor shorts or buys a stock to hedge against another higher-risk asset or balance risk exposure across their portfolio.
These incidental transactions do not necessarily directly affect the stock itself but can alter supply and demand or impact availability, thus influencing the market value.
Every investor has different priorities and expectations, and the price of a stock or share can change depending on the group of investors providing the greatest demand.
Younger investors tend to invest in stocks with higher risk levels, whereas those approaching retirement look for stability and ongoing growth without accepting a greater exposure level.
There is a potential that as older, more seasoned investors cash in their portfolios to finance retirement, the proportion of younger, ambitious investors increases, which can make demand grow for equities and increase demand and, consequently, prices.
Trends can create a short-term buzz about a particular stock or build momentum within a market where investors see stocks or shares produce excellent returns and decide to take a position based on this trajectory continuing.
However, trend analysis is complex and multi-faceted. Stocks will not normally sustain a trend indefinitely, meaning that investors need to calculate the potential for sudden changes or reversals to avoid buying a stock just before it reaches a peak – and begins to shed value.
Liquidity indicates how quickly investors can buy or sell stocks without affecting the market price and depends on investors’ interest volume. A highly liquid stock is easy to sell, retains its price, and has less risk.
Lower liquidity stocks, on the other hand, can be difficult to sell, with the potential to make a larger loss if the investor cannot move at the optimal time.
Other Influences On Stock And Share Prices
While fundamental and technical analysis is essential to successful stock and share selections, other factors can also drive prices upward or downward.
Although the direct consequence of a media report, global event or market fluctuation are difficult to quantify, anything that impacts potential performance will also influence investor sentiment and confidence in the market, sector, or economy.
Examples include trade negotiations between governments, mergers and acquisitions, and other more diverse events affecting the stock market or specific stocks or companies.
For example, an announcement that a competitor is closing might be beneficial if that expands the potential customer demographic for the product or service on offer, causing the stock price to rise. Conversely, larger underlying problems such as lack of sustainability could cause a domino effect, where investors move away from an asset class or trading sector for more risk-averse alternatives.
Investors make decisions based on long-term projections. Even a company currently making a minimal profit could be in demand if investors perceive a strong potential to provide excellent earnings in the future.
Market sentiment is subjective and can alter decisively based on educated guesswork, projections, and confidence.
The nature of market sentiment makes it difficult to calculate the growth prospects of any stock or share with assurance. Markets can focus on one piece of news or one specific event without noticing wider fundamentals that are more likely to steer the company’s future performance.
In some ways, this is the ideal opportunity for seasoned investors to capitalise on. They can buy stocks or shares at a low value when market confidence dips, with the knowledge that makes them believe that prices will grow significantly – and be far more profitable than an asset bought during an upward trend.
What Impacts The Value Of Stocks And Shares FAQ
There are several areas that can impact the market value of a share. These include company performance and reports, economic conditions, market sentiment, news and trends, and broader interest in the industry.
Ultimately, all these factors influence investor demand – the higher the demand for a share, the more it is worth.
Stock prices can change immediately and dramatically and often move multiple times in one trading day. Their primary price influence is supply and demand, which depends on market sentiment.
However, stock prices are quoted based on the most recent transaction, which often occurs every second. Each time an investor buys or sells blocks of shares, the stock price is updated, which means prices can adjust upward or downward continually.
More buyers compete to purchase this asset when a stock or share is tipped to be in higher demand. Increasing buyers equals increasing demand and an upward price trajectory as more investors want to buy the same stock or share.
Several potential methods assess the fair market value of one share, but the standard is to use a price-to-earnings ratio, which calculates the value of company shares less the earnings.
Publicly traded companies calculate a price-to-earnings ratio using the stock price divided by the earnings generated per share.
Uncertainty and market instability are natural consequences of an inflationary economy, and increases in costs and lack of confidence in sustained revenue can affect profit margins and stock valuations.
High inflation, mainly sustained over longer periods, makes investors more nervous about potential changes to central bank interest rates and contributes to price depreciation.
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