Stock prices can move either steadily or erratically,
depending on the several factors that affect them. And as a responsible and smart
investor, you should know what those factors are. If you know what they are,
you can monitor them, and when you can monitor them, you can predict the likely
movements of stock prices in the future.
In this article, we will talk about such factors. If you are
planning on becoming a top stock investor or trader, this article is for you. Read
on!
Company News and Performance
A huge number of factors have something to do with the
company behind the stock that you’re investing at.
For instance, news releases on earnings and profits as well
as future estimated earnings. These reports are released by companies every
earnings season at the end of each fiscal year’s quarter. It’s very important that
you’re updated about these reports.
Among others, you should also pay attention to dividend announcements, introduction of new products or a product recall, a new large
contract, employee layoffs, anticipated merger or takeover, a change in the
company’s management, and accounting errors or scandals.
READ FURTHER: Fundamental Analysis: Intrinsic Value and Other Basics
Industry Performance
In general, the stock prices of companies within the same
industry move similarly with each other. In other words, companies with similar
business models usually move in the same direction.
That’s because market conditions generally influence the
companies in the same industry the same way. However, there are many instances
when a company either benefits or suffers from a piece of good or bad news for
its competitor if the two companies are battling over for the same market.
Investor Sentiment
Investor sentiment or confidence can directly make the market
go up or down and this in turn can cause stock prices to rise or fall. The general
direction that the whole stock market takes can affect the valuation of a
stock.
Bull market
A bull market refers to a strong stock market where stock
prices rise and the investor confidence grows. This most of the time ties with
economic strength or recovery or an economic boom. It could also spur with investor
optimism.
Bear market
A bear market is a weak market where stock prices slip and
investors become jittery or anxious or uncertain, generally causing market crashes (not to be confused with market corrections). This often takes place
when the economy is in the state of recession and the unemployment rate is
high, along with rising prices (inflation).
Economic Factors
There are also economic factors to consider, generally
falling under fundamentals.
Interest Rate
The central bank of a country can raise or lower interest
rates to stabilize or stimulate that country’s economy. This is called their
monetary policy. If a company borrows money to grow and improve its business,
higher interest rates will affect the cost of its debt.
This can diminish company profits and the dividends it pays
to its shareholders. As a consequence, it share price may slip and, in times of
higher interest rates, investments that pay interests usually become more
attractive to investors than stocks.
Economic Outlook
If the economy appears to be ready for expansion, stock
prices usually rise. Investors usually buy more stocks hoping to see future profits
and higher stock prices.
Meanwhile, if the economic outlook is quite uncertain, investors
may decrease their buying and/or start selling.
Inflation
Inflation refers to the higher consumer prices. Most of the
time, this slows down the sales of companies and thus reduces profits. Higher prices
will also usually result to higher interest rates.
For instance, countries’ central banks usually raise
interest rates to control or at least slow down inflation. These changes will
usually bring down stock prices. On the other hand, commodities may fare better
with inflation and so their prices may rise.
Deflation
Lower prices usually mean lower profits for companies and diminished
economic activity. Stock prices may go down and investors usually start selling
their shares and move to fixed-income investments like bonds.
Interest rates may be lowered to encourage people to borrow
more, with the goal of increasing consumer spending and economic activity.
Economic and Political Shocks
The changes around the world can influence both the economy
and stock prices. As an example, an increase in energy costs can result to
lower sales, lower profits, and lower stock prices. An act of terrorism can
also result to a sluggish economic activity and therefore fall in the stock
prices.
Changes in Economic Policy
In times when a new government comes into power, it may
decide to come up with new policies. Sometimes these changes are considered
good for the business; sometimes they’re bad. Therefore, they may lead to
changes in inflation and interest rate. These changes, therefore, can also
affect stock prices.
The Value of the Currency
Many countries sell their products to buyers in foreign
countries. If the currency of that country rises, their customers will be
compelled to spend more in order to buy their goods. This can also drive down
sales, thus leading to lower stock prices. When the currency’s value slips, it
usually makes it cheaper for others to buy products, making stock prices perk
up.
Conclusion
Overall, the factors that affect stock prices should be
monitored and watched carefully if you intend to earn much from stock movements
and be ahead of the game.
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