Insights

Factors that Influence Share Prices

06 June 2019  |  EDUCATION

Numerous factors can cause the price of shares to fall or rise – from news about a company’s earnings to a change in shareholders’ sentiment about the share market in general. Shifts in supply and demand influence share prices, although there is no equation to predict how exactly the share market will behave, there are certain forces that move share prices up and down. Shares can be volatile investment vehicles; here are the principal factors that can influence share prices.        

#1 Company news and performance

Most investors don’t know, but there are company-specific factors that can affect the share price.

These factors include:

          Accounting errors or scandals.

          A change in management.

          Merger or an anticipated takeover.

          Employee layoffs.

          Securing a new large contract.

          Introduction of a new product or a product recall.

          Announcement of dividends.

          News releases on earnings and profits and future estimated earnings.

On the other hand, another factor that can influence share prices is when the company may issue new shares to the public, or buyback existing shares.

Since stocks can be either issued at a fixed price or by ‘tender’ which is when the issue price is determined by the average of bid prices offered by investors, the share price ultimately increases. This is because the supply is low.

Conversely, a stock buyback occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed by shareholders. This is done to reduce supply, and when this happens, the shares are cancelled or stocked for redistribution in the future. The result of share buybacks is the condensing of the total number of shares in circulation.

#2 Industry Performance

Often, the stock prices of the organisations in the same market will move in tandem with each other. This is mainly because market conditions may significantly affect organisations in the same industry in the same way. For example, if a new technology, such as 5G, is planned for released, many telecommunication companies planning to offer it may benefit from the news and experience an increase in their share price.

However, in some instances, a company's share price may benefit from a piece of bad news involving other market participants if the companies are competing in the same market.

 

#3 Investor Sentiment

Investor confidence or sentiment can cause the share market to fluctuate, which can cause share prices to rise or dip. The general path that the share market takes can influence the value of the share. This includes:

1.                    Bear market – a weak market where share prices are continuously falling, and the investor sentiment is fading. This happens in cases when unemployment is high, and the economy is in recession, with rising prices.

2.                    Bull market – an active market where the share prices are continuously increasing, and the investor sentiment is growing. This happens when there is an economic boom or an economic recovery, including investor optimism.

#4 Economic Factors

1.          Interest Rates

Financial institutions can raise or lower interest rates to stimulate or stabilise the nation's economy. This is referred to as monetary policy. If a business borrows money to improve and expand its business, higher interest rates will influence the cost of its debt. This can ultimately reduce the dividends along with profits a company pays its shareholders.  

2.          Economic Outlook

The share price may rise if the economy tends to expand. In the hope of seeing higher future stock prices, investors may buy more stocks. In case the economic outlook is indeterminate, investors may start selling or reduce their buying. 

3.          Inflation

Inflation refers to higher consumer prices. When there is high levels of inflation, it typically slows down sales and reduces profits. Moreover, higher prices may often lead to increased interest rates.

4.          Deflation

Falling share prices relates to decreased economic activity and lower profits for companies. Investors may start selling their shares, stock prices may go down, and investors may turn to fixed income investments like bonds.

5.          Changes in the economic policy

If a new government comes into power, new systems may be formed. In some cases, these changes in the economic policies can be a boon for business, and sometimes, a bane. Changes in economic policies can lead to changes in interest rates and inflation, resulting in influencing share prices.

In summary, share prices may be influenced by a variety of factors. While some investors believe that predicting change is an impossible task, others think that analysing past price charts and movements can determine when you should sell or buy.  When making an investment decision, it is important to consider the factors mentioned above to help minimise your risk.


Risk Disclaimer: The information above is of general nature only and does not take into account your objectives, financial situation or investment needs. Prior to you make an investment decision, please make sure you carefully read and fully understand our Financial Services Guide, Terms and Conditions, Privacy Policy and other relevant documents that you can obtain from this website. Monex Securities Australia Pty Ltd (AFSL No. 363972; ABN 84 142 210 179) is the Financial services provider. Financial products trading carries risks and may not be suitable for all investors. You are strongly recommended to seek independent financial advice before making any investment decisions.

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