You can compare the stock (share) market with waves in an ocean. Stocks rise and fall much like waves. But, why do they rise, and what triggers the fall? Keep reading to discover how share prices increase or decrease so that you can make profits by riding the waves.
But, before learning about the factors that influence stock price movements, let’s understand how stocks function.
How Do Stocks Function?
The stock market is a place of intense volatility. As companies release a part of their ownership to the public (through stock exchanges), the public buys or sells the company’s shares for investing or trading. ‘Public’ refers to both retail as well as institutional traders/ investors. Mutual fund houses or big brokerage firms fall under the ‘Institutional Investor’ category.
It is the market that determines the prices of stocks. If the sellers outnumber the buyers, the stock price crashes. And, when the buyers outnumber the sellers, the stock price goes northwards. Broadly, the demand or supply of a stock is determined by three factors - fundamental, technical, and market sentiment.
Fundamental analysts gauge the value of a company by evaluating its balance sheet, price-earnings, cash flow, business model, management quality, etc., to buy or sell stocks.
Technical analysts read charts to predict the stock’s movement. They use various indicators or draw support and resistance lines on the chart to guess the future performance of a stock.
The market sentiment is a combination of stock performance and news. For example, if a company’s fundamentals are solid and technicals are robust, the stock is likely to rise. But, imagine a piece of news comes about a blast in one of the company’s manufacturing facilities. Despite the strong fundamentals and technicals, the stock will nosedive.
Market sentiment also refers to the broader market condition vis-a-vis the stock’s momentum. For example, if you buy a NIFTY50 constituent on a day the overall market is down, you might not witness the same buyer enthusiasm as you would on a ‘Green’ day.
Now that you know the fundamental mechanism behind stock movements, let’s explore how stock prices increase or decrease or the reasons behind such fluctuations.
Which Factors Influence The Rise and Fall of Share Prices?
Here are the common reasons for the rise and fall of shares prices:
Demand and Supply
As previously mentioned, demand is when there are more buyers than sellers and vice versa.
Some stocks are cyclical. For example, air conditioners sell more in the summer. Hence, investors assume that a leading air conditioner company will show better results than the first quarter in the second or third quarter. Therefore, they often buy such shares before the second quarter and move out before the fourth quarter.
Since the railway budget is presented in February every year, companies catering to the railway sector usually occupy the limelight from December onwards.
But, the stock market is full of companies of various shapes and sizes, and cyclical is just one part of it. The following sections explain the other factors that affect the increase or decline of a company’s stock price.
Buying a share means owning a part of the company. Hence, whatever good or bad happens to the company, your stock will feel the vibration.
A company’s stock may rise or fall based on the company’s announcement of earnings estimate. Similarly, if the company declares a dividend or bonus issue, the stock might go up. Investors or traders may also appreciate a product launch or merger and buy in higher volumes. In contrast, if the company announces a major management change, scam, or product recall, the stock price may go southward.
Big brokerage houses and self-proclaimed market pundits issue free/ paid stock recommendations every day. New investors or traders unwilling to research independently follow expert recommendations to buy or sell stocks. Sometimes, institutional investors/ traders also follow these recommendations to gauge the public reaction.
The recommendations might cause an increase or decrease in stock prices. However, intelligent investors filter these recommendations through their lenses before buying or selling such stocks.
The Broad Trend
At any particular time, the market can be in either of three phases - bull, bear, and sideways.
The bull phase refers to a perennial ‘Green’ market. Every trader becomes euphoric about buying stocks in a bull market. This happens when investors are incredibly confident about the economy in general and companies in particular. If you can enter just before the bull market starts, you can make insane profits within a few days.
The bear phase is the opposite of the bull phase. Investors sell stocks at every opportunity, and even companies with solid fundamentals get beaten in this phase. However, this phase can also be a good opportunity for buying. Value hunters wait for such phases to pick high-quality stocks at attractive valuations.
Sideways refer to a market condition where the volatility is extremely low. Stocks in sideways momentum do not go up or down much, and even experienced investors face problems identifying a sideways market.
It’s Time to Apply Your Knowledge to Make Profits
Besides the factors mentioned above, some other factors which might affect the stock price are the economy, interest rates, inflation, crude oil and gold prices, GDP, global market conditions etc.
Visit 5paisa to read more such interesting articles on personal finance and the stock market and sharpen your trading skills.