Factors that Influence Share Prices
One can never be sure as to why share prices rise or fall. Like all assets that we own, share prices also change depending on the supply and demand chain. Simply put, the share price rises when there are more buyers than sellers in the market and the share price falls when there are more sellers compared to buyers.
But there is more than just the supply-demand ratio. What are the reasons for the growing number of buyers or sellers?
There are several factors that influence the share price at which buyers and sellers are ready to exchange them. Few of the factors are related to the specific company and some to the sector as a whole. At times there are global factors which can influence share prices.
Irrespective of whether you own shares or not, understanding the factors that influence share prices can be useful especially if you plan to invest in shares in the future, you need to have a clear understanding of how the markets function and how the prices can fluctuate even with the smallest market events or company news.
Let us examine the key factors which drive the demand and supply influencing share prices.
1. Supply factors
The critical point to understand in the supply chain is that when investors begin to sell, the supply of shares in the market increases. And with the increase in the supply, the price of the shares may start falling, especially of there are a lot of sellers all at once.
Here are some of the supply factors which influence share prices:
• Share issue by the company
A share issue by the company means a new release of shares to the public. In simple words, when dividends are made available to the public to buy, the number of shares in circulation in the stock market is generally low, and so the influx of new shares by the company will increase the supply, and more investors can buy them. This can result in lowering of the share price. At the same time, if the share supply from the company is limited, and many investors want to buy the stock, the supply is low, thereby increasing the share price.
• Buyback of shares by the company
To reduce the supply of shares, companies buy back their shares from the market. They pay the investors an amount and buy some of them back. After the buyback the shares are either cancelled or are planned to be redistributed at a future date. This results in a reduction of the total number of shares in circulation in the stock market, eventually increasing the share price and the company’s EPS (earnings per share). Sometimes when a company has a lot of cash in the bank, it may elect to spend some of that money to buy back shares, which can act as a return to investors in the form of a share price increase.
• Investor Selling
Investors are the sellers who increase the number of shares in the market by putting them on sale, thereby increasing the supply. Investors sell when they have earned profits and want convert their return to cash or conversely, when they feel that the share is losing value and they need to cut their losses. If the demand for these freshly put up shares does not match up to the supply, the price of the shares will usually fall. Alternatively, if the number of buyers is more than compared to the stocks put up for sale, the prices of the shares will usually rise.
2. Demand factors
Demand increases value of shares; if there is no demand for shares, there is no increase in value for them.
Some of the demand factors which influence share price:
• Company News
Any news about the company, whether expected or unexpected, good or bad, can have a strong influence on the share price. For example, the publishing of a company’s revenue report that shows significant growth and profit will have a positive impact on the share price, as the demand for the shares will increase. At the same time, declaration of losses or missed targets or the death of a prominent company representative can negatively impact the share price, because people tend to panic in such situations. Even natural disasters like storms or earthquakes can disrupt the business, impacting its revenue, resulting in lesser demand for shares.
• Economic factors
Economic factors such as change in the interest rates, foreign exchange rates, inflation rates etc. all influence share price. If the interest rates and inflation are increasing, it means that the economic outlook is not positive, which will reduce the demand in the market, eventually pushing the share price down.
• Industry trends
Share prices are often determined by changing industry trends. Companies in the same industry tend to perform similarly and are affected by the same issues and problems. Hence if one sector is thriving, demand for the shares of companies in that industry also increases. At times demand for a company's stock also increases the share price of competitors in the same industry, even if the competitor is not doing so well.