What Factors Affect a Stock Price?
If you're just beginning to invest in stocks, one of the most important things you need to understand about the market is what factors can affect a stock price. Even experienced professional traders can sometimes be confused when they see their shares take a dive. While there's thousands of reasons a stock price may increase or decrease, there's a few amongst those that are more common when it comes to fluctuations. These primary factors are what every investor should know about it and study in order to be a successful trader.
Supply and Demand
This is the most important factor when it comes to stock price fluctations. In order to sell your shares in a company, somebody has to buy them and has to be willing to pay the price you want for them. Sometimes the demand just isn't there and there is less people buying and more people trying to sell at higher prices than the buyers are willing to pay. This can cause a stock price to slide because whenever everybody is selling and nobody wants to buy a stock, that's usually bad for the stock price. When everybody is buying and there's lots of demand, it's usually good for the company and those looking to sell.
Events around the world can greatly affect a stock's price. In fact, they often affect the entire market. Majority of stock market crashes are not because of one company, but usually because of a larger problem in the world or the financial sector that brings the entire market value down. For instance, something like war can be good or bad for the overall market, though it's usually bad. If a company specializes in a certain industry, it can be affected if the overall industry is somehow affected. Often, a financial crisis in one country can affect another country's market. If the USA stock market suffers for any reason, as a whole, then it often affects other countries as well. A financial crisis in Thailand could easily affect American stocks. So it's best to keep up on world news and be aware of what is happening on planet earth and beyond.
Companies that are traded publicly will always release earnings reports, both quarterly and yearly. These are crucial to keep your eye on, because if a business has slow sales and their earnings for a quarter are less than the previous quarter's, investors may have less confidence in a company and decide to sell it. Even companies that are still turning profits every quarter can be affected. This is because the stock market is based on lots of speculation. So if lots of people have invested in Disney stock, for example, and they expect Disney to report a $2 billion profit, but Disney says they only made a $1 billion profit, the stock price may take a hit and people may start selling. The same can be true for losses. If a business has a loss and didn't make a profit for the quarter, but the loss wasn't as much of a loss as in the previous quarter, their stock price may actually increase, despite the fact that they didn't make a profit and are losing money. This is also in relation to investor confidence. Those who have invested in the corporation may feel more confident about investing more, because they see the company is starting to improve and the losses are minimizing.
It's fairly common for a business to report news about their company or products. This news can affect the share price because good news for a product, industry, or company is good for their stock. Bad news is obviously bad. Sometimes an entire sector can be affected by one company's bad news. For example, if a stem cell company is having trials for stem cell treatment, and they report that the trials failed and they didn't acchieve the results they wanted, this can affect all the other stem cell stocks, it can even affect the entire pharmaceutical sector, depending on the actual news and how prominent the company is.
Pump and Dump
Pump and Dump is a common scam in the stock market, in which scammers will attempt to artificially inflate a stock price, so they can sell their shares in it and profit. If you've ever seen the movie Boiler Room, then you already have a rough idea of what I'm talking about, as that was very similar to a pump and dump scheme. To defraud people, the fraudsters will usually send out emails or letters or use other various methods of contacting thousands or millions of people. As they convince more people to buy the stock, the stock price adjusts and increases from all the buying. The scammers will take their profits and sell a large chunk, which can cause the price to decrease a little and can spark a sell off, as investors realize that the price was artificial and was not in relation to the actual value of the company. The SEC has set up a number of laws to try to stop people from using this particular scheme, but it is still fairly common, especially amongst penny stock companies.
The PE Ratio, which stands for Price to Earnings Ratio, can be an important factor as well, though some people dispute this. There seems to be a lot of controversy over whether or not a PE Ratio has an affect on a stock price. In my opinion it's a very handy factor to take into consideration. In layman's terms, the PE Ratio is the current share price of a stock, divided by the earnings a company made for each share. As an example, let's say Microsoft has a share price of $24 per share. They come out and state on their earnings report that the company earned $3 for every share their company has. The PE Ratio for Microsoft's stock would be 8, because you would divide $24 by $3.
One of the best factors in determining a company's present worth, is to look at their Market Capitalization (or Market Cap for short). To do this, you would look at how many shares they have on the open market, and multiply that by the current stock price. You can't really assess the value of a company simply by the current share price. For example, let's pretend Walmart is a small company and only has 10,000 shares on the market. Let's say their share price is $10 a share. Their market cap would then be $100,000, not $10, because you would multiply the share price ($10), by the number of outstanding shares (10,000). In the finance world, companies are often categorized as one of 3 groups: Small Cap, Mid Cap, and Large Cap. What this means is that they company is assessed according to their Market Capitalization. A company that is estimated to be valued between $10 billion and $200 billion is a large cap. One that is valued around $2 billion to $10 billion would be a mid cap, and $300 million to $2 billion would be small cap. There are other types of caps as well, such as Mega Cap, Micro Cap, and Nano Cap, however these terms are not used quite as much, as there are not as many companies that fit into those groups. Market Capitalization doesn't take into consideration other factors such as a company's debt. This would be called Enterprise Value (abbreviated as EV). So if you just want a rough estimate on a company's value, you can go by their Market Cap. But if you want their true value and a more precise one, you will want to factor in other things such as their debt and deduct that from the Market Cap value.
comments powered by Disqus