Novice stock market investors often wonder why stocks fluctuate so much, how share price is calculated and why share price increases. Stock prices, unlike MRPs for merchandise, aren’t determined by the seller. They are entirely market-driven. Various market forces collectively drive share prices up or down.
Every stock represents a company. Every company has assets and liabilities and operates within an industry. Every industry operates within an economy. Every economy is part of the global economy. Plus, how online trading India investors react to fluctuations in these factors also plays a crucial role in driving stock prices.
At its core, the demand for and supply of a specific stock in the stock market moves prices. When demand at a given price outstrips supply, prices rise and vice-versa. Therefore, any reference to factors affecting stock prices chiefly touches upon factors that may affect demand-supply trends on a specific stock counter.
The factors affecting stock prices can be broadly classified as:
When these factors turn negative, markets suffer. In other words, when the GDP growth slows down, inflation gathers steam, twin deficits rise and the unemployment rate rises, markets take a beating. That said, some of them are the leading indicators while a few others are lagging. For instance, commodity prices can rise or fall much before actual GDP growth picks up or falls.
Highly capital-intensive sectors or the ones that require higher technological know-how and have long gestation periods, usually have limited competition. For instance, heavy engineering businesses, oil and gas and the life insurance sector usually have only a few players.
Unless the industry is tightly regulated, a higher growth outlook usually attracts a larger number of players. If the entry barriers are low, naturally, the competition can become extremely intense when the sectoral outlook looks positive. Industries have earnings upcycles and downcycles.
For instance, during the economic boom of 2002-2008, the competition in the Indian banking sector became extremely intense. Many lenders priced their loans quite aggressively and also cut corners to accommodate even the not-so-deserving borrowers. As a result, the profitability of the Indian banking sector suffered almost for a decade thereafter, thanks to a deterioration in asset quality. It’s only recently that the banking sector has purged itself from asset quality issues and now looks in fine fettle.
Companies with a higher market share, a unique business model and higher competitive advantages usually become investors’ favourites. Similarly, investors chase companies that earn a higher return on capital, make efficient and diligent use of resources and have manageable debt levels.
Companies declare their business performance on a quarterly basis. Investors track their quarter-on-quarter as well as the year-on-year numbers. When companies exceed the expectations of investors, stock prices react positively and vice-versa.
Geopolitical tensions, wars or even war-like situations make markets jittery. Depending on the complexity of issues and the role of geographically affected areas in the global economy markets take cues. Similarly, unforeseen natural calamities such as cyclones, tsunamis and earthquakes, among others, affect stock prices negatively, albeit temporarily. On the other hand, the inflows and outflows of global investors play a crucial role too.
All factors that we have considered so far—macroeconomic, industry-specific or company-specific and external—take their own time to play out. But if investors expect them to improve or worsen, markets move accordingly. In other words, stock prices move not only when corporate earnings go up or down but also when investors estimate them to go up or down.
Optimistic investors pay more for buying stocks. However, pessimistic investors often shy away from stocks even when the prices are falling. Psychological factors have a significant impact on stock market valuations.
Multiple factors move stock prices and studying them comprehensively is the key to identifying multibagger stocks. Don’t rely on stock tips you get from unverified and unreliable sources. Instead, you may refer to our research notes and quarterly updates to learn about high-potential stocks to buy.