The law of supply and demand drives short-term stock price fluctuations. Each day, billions of shares of stock are traded, and it is this trading that determines where values will settle. But what exactly is it that makes people want to buy stock in such large quantities that it drives up its price? It all comes down to how investors feel. Let’s learn about the determining factors of stock market price rise and fall.
Factors affecting stock market prices
Several factors decide the rise or fall of stock market prices. Some of them are:
- Analysts’ predictions for the stock.
- How investors feel about the sector.
- Stock market optimism among investors.
The more expectations investors have for a company’s future success, the higher the demand for the stock will be. Conversely, if investors lose faith, they may sell their shares, causing the stock price to fall.
Market sentiment about an industry is another factor that can move the price of a stock up or down. For instance, the stock price of an electric vehicle manufacturer may skyrocket if investors believe strongly in the industry’s promising future. All boats can rise with a rising tide.
In this case, both parties are at fault. It doesn’t matter how well individual companies perform if investors turn against an entire industry.
What is a “price band”?
Stock market volatility is kept under control by employing price bands. It’s the maximum allowable increase or decrease in a company’s stock price.
The price range for equities might range from 2% to 20%. The stock exchange determines this range after reviewing the share’s past price behaviour. The daily price range also considers the previous day’s closing price.
Supposing the previous day’s closing price for ABC company’s stock was Rs 100 and the price band was 10%, we would have the following scenario. The minimum price could be 90, and the maximum price would be 110.
The maximum limit of this range will be 10% over the prior day’s close (Rs 100). Thus, Rs 110 is the highest possible range. The lower limit of the price range will also be 10% below the prior day’s closing price (Rs 100). As a result, Rs 90 is the lowest possible pricing range. For the day as a whole, Company ABC’s share price has a range of 90 to 110. The stock price is capped at this level.
What causes stock prices to rise and fall?
Reasons for the growth and fall of stock market prices typically include the following:
Providers and Consumers
There is a demand for anything when there are more potential purchasers than there are sellers, and there is an excess of sellers when there are more potential purchasers.
In the stock market, certain companies’ fortunes naturally follow business cycles. For instance, the summer is the peak season for the sale of air conditioners. Therefore, investors anticipate that a market-leading AC manufacturer will report stronger earnings in the second or third quarter compared to the first. As a result, they tend to purchase these stocks before the end of the first quarter and sell them before the end of the third.
However, cyclical businesses are just one subset of the stock market’s vast array of publicly traded organizations. Below are further explanations for why stock prices go up or down.
News from the Company
Your stock will experience the effects of company news, both positive and negative. The revelation of an earnings estimate can positively or negatively affect a company’s stock price. Another event that could cause a stock price increase is the corporation’s dividend or bonus announcement. Additionally, a product launch or merger may be well received by investors and traders, leading to increased buying activity. However, the stock price may fall if the company discloses a major management change, swindle, or product recall.
Analysts
Every day, major brokerage companies and so-called market pundits provide stock recommendations for free or a fee. In the stock market, novices and traders who aren’t willing to do their studies often rely on the advice of industry professionals. Institutional investors and traders will sometimes follow these suggestions to measure the general public’s opinion.
Stock market prices could go up or down depending on how the recommendations are received. However, intelligent investors take these tips with a grain of salt before deciding whether to purchase or sell a company.
The General Tendency
The market might be in a bullish, bearish, or neutral phase at any given time. When the stock market is rising, investors are all over the place with excitement. This will occur if investors are very bullish on the economy and individual firms. You can make incredible profits in only a few days if you enter the market right before a bull run begins.
The bear phase follows the bull phase’s antithesis. During this phase, investors sell their stocks whenever they can, and even businesses with strong fundamentals get beat up. It’s important to remember that this period is also a favourable time to make purchases.
When markets are sideways, volatility is very low. Stocks with sideways trends do not go up or down significantly, and even seasoned investors find challenges in detecting a sideways market.
What Counts is the Big Picture
Long-term investors aren’t too concerned with the daily fluctuations in stock prices caused by news events. When you have time, even short-term events like earnings surprises and analyst reports are unimportant. It’s not where a business is today that matters, but rather where it will be in five, ten, or twenty years.
Long-term, a stock’s worth is proportional to the cash flow the company is expected to create. No matter what happens in the near term, investors who think a company can grow its profits may be willing to pay a greater price for its stock today.
A stock price may also be affected by factors such as the market, interest rates, rising prices, the price of crude oil and gold, and the gross domestic product. The conditions of the global market also affect the prices. You can find more finance-related blogs at Piramal Finance.
