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In a nutshell
Stock prices fluctuate constantly based on supply and demand. But there are various other factors that contribute to a stock’s value, from world events to inflation and more.
- Stock prices are determined by supply and demand, with more in-demand shares showing higher prices.
- Demand is determined by a variety of factors, including a company’s performance, the state of the economy and more.
- Buyers and sellers look for opportunities in the fluctuation of stock prices, either to add long positions to their portfolios or as an entry for short selling.
Factors that determine stock price
Stock prices are primarily determined by supply and demand. When demand for a share of a company is high, the price goes up. When demand is low, the price drops.
The factors that go into generating demand for a particular stock are more complex. These are numerous and far-reaching, including everything from a company’s financial performance to natural disasters and major political events. The following are all key factors that can influence a share’s price.
Company performance
When you own a share of a company, you want that company to perform well, bringing in high profits and showing sustained growth. Investors closely watch a company’s performance to determine if a stock is worth the investment. If earnings are low in a given quarter, demand for a stock typically falls and the price of that stock along with it.
Other company happenings can also affect stock prices, due to their perceived effect on a company’s future performance. This could include a change in leadership or a similar major change in direction. The same goes for controversy and scandals, like data leaks or fraud among the leadership.
The state of the economy
In many cases, the performance of a country’s stock market is used as a marker of economic health. But an economy’s performance is marked by more than just stock prices, including unemployment rates, the housing market and gross domestic product (GDP). Economic performance is based on data for the preceding months, which is called a lagging indicator, while stock prices are often based on expected future performance.
Because of the relationship between an economy’s health and the stock market’s performance, economic performance is often used by investors to make purchasing decisions. When a country is in a recession and economic performance is poor, investors might be motivated to sell a stock before its price drops. Similarly, stock prices may start to rise in a period of economic growth in hopes of stock market growth alongside it.
Inflation
In periods of inflation, prices for goods and services quickly rise and the buying power of your dollar — the value of your currency — falls. Historically, the stock market as a whole has been seen as a hedge against inflation because share prices rise in tandem with the rise in prices for other commodities. But when you dig down a little, you see that certain sectors of the market are more adversely affected by inflation than others. For example, a recent study by Duncan Lamont, CFA and Head of Strategic Research for Hartford Funds found that market sectors like utilities, consumer discretionary and energy historically outperformed during periods of elevated inflation (in their study, above 3%), while stocks in the consumer discretionary, information technology and mortgage REIT sectors underperformed.
Part of the discrepancy lies in the ability of some companies to raise their prices and pass on costs to consumers while others suffer as consumers pull back their spending and input costs increase cutting into profit margins.
World events
The performance of the stock market is often tied to global economic performance. When the world economy is strong, global stock market performance is often strong, too. Because of this, major geopolitical events can affect stock prices.
For example, suppose there are trade disputes between major powers or natural disasters in a particular country that affect an industry or sector’s supply chains and future performance. Investors are therefore likely to pull their money out of those stocks sending the prices lower.
Investor activity
Stock prices go up if demand for their shares increase, so it stands to reason that investors themselves have an impact on the fluctuation of share price. This is especially true of larger investors — namely brokerage firms and hedge funds — who make large purchases, which represent a greater percentage of a company’s shares. When large, institutional investors start investing heavily in a particular stock, the price is likely to rise in response. Similarly, companies will often buy back shares of their stock. Fewer shares on the market means increased demand, which in turn means higher prices.
Recently, a new phenomenon emerged that has driven the price of some shares, called meme stocks, to heights unrelated to their company’s underlying value. While it is illegal to engage in “pump and dump” schemes, some sub-Reddits have made the value of certain stocks soar not by selling inaccurate stories about the stocks but by organizing buyer protests.
The difference between stock price and stock value
According to investing titan Warren Buffet, “Price is what you pay, value is what you get.”
Essentially, a stock price is the amount you spend to acquire your shares. Stock value, on the other hand, is what that share is worth, based on factors including a company’s earnings, market share and competitive edge against similar companies.
Market cap’s effect on stock price
Market capitalization — also known as market cap — refers to the total value of a company’s outstanding stock, whether it is held by the public or internally. Because stock prices are constantly fluctuating, a company’s market cap also changes. (You have to multiply a company’s number of shares by the current share price to get its market cap.)
A company’s market capitalization is sometimes used as a proxy for its market share and its stability. The largest three companies by market cap in the U.S. as of May 2024 are (in order) Microsoft Corp at $2.89 trillion, Apple Inc. at $2.63 trillion and Nvidia at $2.16 trillion. (It’s worth noting that the numbers after the decimals are hundreds of billions of dollars.) The revenues and profits of these companies are also in the hundreds of billions of dollars, which is why their market caps are so high. Investing in these companies has been a safe decision for many people, though investors should always keep in mind that that former corporate behemoths, like General Electric and Boeing, have seen their market caps fall a lot as their businesses were disrupted and their profits fell.
Because stock prices aren’t necessarily an accurate representation of the actual value of a company, but rather, the investor’s perceived value, the market cap isn’t a wholly accurate picture of a company’s value. Still, it can be a useful piece of information when evaluating investment opportunities. As a unit of measurement that relies on stock prices, market cap doesn’t have an impact on stock prices.
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Stock prices are a complex set of information determined by a variety of factors including the state of the economy and company performance. That said, these factors all contribute to a much more basic principle of supply and demand. If demand for a particular stock is high, the price will rise and vice versa.
Frequently asked questions (FAQs)
Is there a formula for predicting stock price?
While it is impossible to predict future stock prices with 100% accuracy, there are formulas that investors use to predict the performance of stocks. These look at factors including the price-to-book (P/B) ratio, price-to-earnings (P/E) ratio and price-to-earnings growth (PEG) ratio to try to predict the potential gains for a particular stock. It’s also becoming increasingly common to leverage technologies like machine learning to develop more accurate estimates of a stock’s performance.
Can investors manipulate the price of a stock?
Investor activity is a factor that contributes to the price of a stock. When more people are purchasing many shares, the price will rise, and when they sell, the price falls. However, an individual investor’s control over stock price is negligible, and even the effect of large investors like hedge funds and pension funds is relatively insignificant to highly traded stocks.
Is there a difference between share price and stock price?
No, share price and stock price are two terms that refer to the same concept. Share and stock are often used interchangeably to refer to owning a portion of a company, with stock more commonly used to refer to a unit you are purchasing and share to refer to the percentage of a company you own.
AP Buyline’s content is created independently of The Associated Press newsroom. Our evaluations and opinions are not influenced by our advertising relationships, but we might earn commissions from our partners’ links in this content. Learn more about our policies and terms here.
