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15.Factors affecting Stock Prices

Stock prices are influenced by various market forces including market sentiment, industry performance, earnings results, mergers, new product introductions, major contracts, share buy-backs, dividends, stock splits, and analyst ratings. Each factor can lead to price increases or decreases based on investor perception and market conditions. Understanding these factors is crucial for predicting stock price movements.

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13 views4 pages

15.Factors affecting Stock Prices

Stock prices are influenced by various market forces including market sentiment, industry performance, earnings results, mergers, new product introductions, major contracts, share buy-backs, dividends, stock splits, and analyst ratings. Each factor can lead to price increases or decreases based on investor perception and market conditions. Understanding these factors is crucial for predicting stock price movements.

Uploaded by

sumannag9706
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Stocks price changes due to market forces, i.e.

buying and
selling of the available stocks in the market. The following are
the factors that affect or even predict the buying or selling of
stock that ultimately affects stock prices of companies.
i. Market sentiment. The price of the stock of a company is
affected most of the time by the general market direction
during a session. In a bull market, the stock price of most
companies will rise and in a bear market the stock price of most
companies will fall. One can gauge the market sentiment by
looking at stock indexes or its future price movement.
ii. The performance of the industry. The performance of the
sector or industry that the company is in also plays in part in
determining the stock price of the company. Most of the times,
the stock price of the companies in the same industry will move
in tandem with each other. This is because market conditions
will generally affects the companies in the same industry the
same way. Of course, there are exceptions to this. Sometimes,
the stock price of a company will benefit from a piece of bad
news in its competitor if the companies are competing for the
same target market.
iii. The earning results and earning guidance. The main
objective of a company is to make profit. Therefore, investors
and traders always assess a company based on its Earning per
Share (bottom line) and Revenue (top line) and its future
earning potential. This is also closely monitored by investors
and is an important factor that will affect the company stock
price.
iv. Take-over or merger. In general, a company being taken-
over is anticipated to get a stock price boost and the company
taking over another company shall experience a drop in its
share price. This is assuming that the company is being taken
over at a premium, meaning it is being bought over at a higher
price than its last traded stock price. Depends on the agreed
term, a company can be bought over by cash or stock (of the
acquirer) or a combination of the two. In some minority cases,
the stock price of the acquirer may get a boost if it is perceived
that the acquisition shall contribute to its earning or revenue in
the near future.
v. New product introduction to markets or introduction of an
existing product to new markets. The introduction of new
product to market is seen as a revenue enhancer for a
company. This also applies to an existing product that breaks
into new markets. Sometimes, the prospect of a new product
introduction suffices to improve the stock price of a company,
this is often observed in surges in stock prices of
pharmaceuticals companies after the announcement of
successful clinical trials, or FDA approvals for new drugs.
vi. New major contracts or major Government Orders. A
company that is able to obtain new major contracts or major
government order is expected to see a bull run in its stock
price. Those companies that fail in the contract bidding
normally experience the fate of sell-off in its stocks.
vii. Share buy-back. The act of share buy-back by a company
will reduce the number of share available in the open market.
Due to the law of supply and demand, a reduction in share
available for trading in this case will cause a drop in supply, this
will normally help increase the share price. Also, the continuing
buying back of share of a company will also acts as a support
for the share price that helps to maintain or increase the share
price. The investors may also see the share buy-back by
company as a confidence booster for them in the company
itself. Therefore, share buy-back is quite often used as a tool to
deliver value to the investors.
viii. Dividend. The stock price may increase by an amount close
to the dividend per share value. However, the stock price may
drop on the ex-dividend date by the dividend per share
amount. This is because anyone buying a stock on or after the
ex-dividend date is not entitled to the corresponding dividend
payment.
ix. Stock splits. Stock split in theory should not have an impact
to the stock price. However, it is generally observed that
whenever the stock price increases (after taking into account
the increase in the number of share) after a stock split. Some
attributed to the better affordability of the stock after stock
split; some attributed this to the perception of cheap stock due
to the lower stock price after the stock split. Some however
believes that stock split has no real impact on the stock price
(effective stock price, taking into account the change in number
of shares), as the stock price will increase regardless of stock
split.
x. Analyst upgrade / downgrades. Analyst upgrade and
downgrade to a stock may have positive or negative impact to
the stock prices. However, one needs to be wary of the fact
that quite often analysts’ upgrades or downgrades happen
“after” some important news about a company. For example
following a extremely disappointing earning result, many
analysts will likely to downgrade the company stock. So, it is
very likely that by then the stock price of that company has
already priced-in the poor earning result, and analyst
downgrade may not have further impact to the stock price.

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