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What Determines Share Prices?

Date Modified: 06/08/2023

Generally speaking, the price of a company's shares will constantly fluctuate and is influenced by the company’s performance and profitability, as well as the general market and public sentiment towards the company. Traders and investors who want to better understand the stock market and make wiser decisions when picking stocks should also be aware of a few other specific factors that can affect the shares’ prices. Accordingly, the below factors can help you understand the stock market better. Traders and investors who want to better understand the stock market and make wiser decisions when picking stocks should also be aware of a few other specific factors that can affect the shares’ prices. Accordingly, the below factors can help you understand the stock market better.

Supply and Demand

The main factor that determines the price of a share is supply and demand. As the terms suggest, supply refers to the availability of the particular share, and demand is the desire for it. Low supply and high demand raise the price of a share, while high supply and low demand lower it.

When news and reports show good performance of a company or forecast growth in its sector, demand for its shares grows and the stock price rises accordingly. On the other hand, negative news and forecasts will cause the demand to decline; investors would be less likely to buy shares and more likely to sell them off, which would, in turn, increase the supply of the share in the market and lower the price accordingly.

Supply and demand for a share is affected by a number of factors. Let’s take a look at them:

Corporate Finances and Performance

Publicly traded companies are required to publish reports that include their recent earnings, current cash flow, and performance forecasts. The reports and a company’s subsequent performance after the issuance of those reports can affect supply and demand for a company’s shares; good performance will increase demand for its shares and bad performance will cause it to decline.

Dividend announcements can also influence the share price. If dividends are higher than expected, then share prices tend to increase and vice versa.

Additionally, the companies management and internal relations also play a role in an investor’s attitude toward a company, which in turn would affect the price of a company’s stock. If leadership is capable and stable, and the company is known to have a robust social responsibility policy, then it is generally considered a company likely to continue to grow and succeed. To keep track of important events like earnings releases traders can refer to Plus500’s free economic calendar.

Economics

Share prices tend to rise during economic booms and tend to fall during recessions. Interest rates also affect share prices. In lower interest rate environments, investors will generally look for better returns in higher-risk assets. This generally leads to greater inflows into the equity markets. Conversely, when interest rates are higher, investors will take the higher rates on offer because of the lower risk involved. This tends to lead to lower demand for equities. In addition, inflation is considered to affect a company’s buying and spending power, as well as that of its customers, and therefore, may cause their prices to move accordingly.

What Are Blue Chip Stocks?

While generally stocks tend to underperform during times of economic turbulence and high inflation, there are stocks that historically have preserved their value or have increased in value. These types of stocks are called blue-chip stocks and they are stocks of companies that are known for their financial stability and reputation. Prominent examples of blue-chip stocks are McDonald’s, Coca-Cola, and Disney all of which are available at Plus500. Nonetheless, past performance is not always indicative of future performance, this is why traders should keep in mind that even blue-chip stocks can underperform in certain economic conditions.

Grid with icons for corporate finances, economics, politics and performance.

Politics

Political factors also play a part in stock prices since the environment in which businesses operate is molded by the government. Politics have a direct effect on international relations, regulations, monetary and fiscal policies, lawmaking, taxation, and many other aspects of the economy. This, in turn, may influence the ability of a company to do business, the price of base materials, the marketing and distribution process, and many others. And all of these factors may have a strong influence on the performance of a company. For example, the sanctions imposed on Russia by the US and European countries, in light of Russia’s invasion of Ukraine in February 2022, affected many companies’ shares. The British energy company, BP, for instance, dropped substantially due to its sanctions on Russian energy company, Rosneft. Therefore, the effects of geopolitical tensions can immensely affect the prices of shares.

Market Sentiment

Market sentiment is the collective psychology of investors, and what they think will happen with the market. Market sentiment is usually based on the factors mentioned above, as well as the news and a company’s reputation and a stock’s price may greatly rise or fall if the general sentiment goes in a particular direction.

Often, though, investors base their trading decisions on trends, either riding the wave of the trend and creating momentum, or believing that the trend will soon revert and going against it. Being able to read where the market is heading based on investors’ incline, may allow one to capitalise from a changing direction.

How are share prices analyzed?

If you are interested in better understanding the pricing of the shares you choose to trade, you can use technical and fundamental analysis to do so. While you cannot guarantee that your analysis of prices will be precise, you may be able to use the analysis to choose your next trade.

Technical analysis uses past price movements and repetitive patterns in order to forecast future price patterns. While recurrent past prices can often act as a decent indicator for future movements, traders should, however, keep in mind that the market is very volatile and that past results are no indicator of future performance.

Fundamental analysis looks at a company's financials and external factors in detail and it is often used to determine the value of a stock and gauge price movements, such as return on equity (ROE), price-earnings ratio (P/E), and relative dividend yield.

Final Thoughts

Stock prices are driven by a variety of factors, but ultimately the price at any given moment is due to the supply and demand at that point in time in the market.

Generally speaking, short-term investors will look closely at trends, inflation and economic factors to make their trading decisions, while long-term investors will focus on the company’s performance and earning power.

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