Stocks are constantly rising and falling, so it may be challenging to choose the best time to buy or sell them. Many factors can increase or decrease the share price. But at the same time, some aspects have a bigger impact on the value of shares than anything else. Let’s find out what affects a stock price the most.
The answer to why stocks go up and down lies in supply and demand — two main factors that affect stock prices. Thus, if external factors have generated demand, then, accordingly, the share price will also increase. And if the demand for shares decreases, then the price will go down. Understanding what determines a stock price will help you predict price changes in time and improve the results of long-term investment.
What Causes Stocks to Go Up and Down?
While several factors can have an impact on a stock's price, there are a few main ones that you should pay special attention to during your analysis. So, let's give an answer to the question of what affects the price of a stock and highlight the most important of them.
Supply and demand
To understand what makes stock prices go up and down, first, we should find out how the market price is formed. Buyers form demand, represented by the bid price on the left side, and sellers determine the offer, expressed by the asking price on the right side. Thus, the highest bid is the maximum price buyers are willing to pay, and its size indicates how many shares they are willing to buy.
The ask, also called the offer price, is the lowest price at which sellers are willing to sell a share, and its size indicates how many shares they are willing to sell. It is clear that the bid and ask prices will fluctuate depending on the current supply and demand.
The number of shares outstanding
Another major part of what affects stock prices is the number of outstanding shares — the total number of shares issued by the company. The number of shares in free float indicates how many shares are actually available for trading. Determining the number of shares available for trading is almost impossible, as the number of buyers and sellers is constantly changing and can be unlimited.
However, traders can approximate the range of stocks available for trading. If there are not many free floats, supply is low, and so less demand is needed to push the price up. Conversely, if a company has a lot of publicly traded shares, the offer is significantly bigger. Therefore, it will take buyers a huge effort to affect the price.
Fundamental data
The fundamental data of the shares relate to the company's financial performance and reflect the business results. Although the true value of a company does not always correspond to its public valuation (share price), it can still be why stock prices change. Popular financial metrics that are used to quickly analyze and evaluate a company include price/earnings ratio (P/E), price/sales ratio (P/S), free cash flow, enterprise value, and book value.
News can also provide information about significant changes in the company's activities and answer the question of why a stock goes up and down. Profit reports are released at the end of each quarter. The release of the report is often accompanied by a conference call, during which shareholders have the opportunity to learn information from the company's management.
Analyst forecasts and investor sentiment
One more factor on the list of what drives stock prices is the forecasts of experts. Analysts of investment banks learn the macroeconomics, news, and financial results of companies, conduct technical analysis, and form forecasts of changes in quotations based on the received data. If investors agree with the experts' opinion that the company will profit from a certain action, then they can buy shares before this event occurs. This is what causes a stock to go up as the demand for securities is growing.
Industry standards
The stock market consists of numerous sectors, such as healthcare, information technology, related products, and others. In turn, sectors are divided into industries. Perception plays a vital role in driving the prices of a stock. Money tends to gravitate toward hot sectors and especially trending industries within such sectors. Investors can use financial indicators specific to a particular industry to compare competing companies.
The average Price/Earnings ratio is a popular metric used by mutual funds and small investors. You can find out the average P/E ratio by looking at the characteristics of the most widely traded ETF in a given sector or industry. For example, if the average P/E of a sector is 20.49, it can be used as a benchmark to evaluate companies within that industry.
Industry trends
Another point of our guide on what determines stock value is that a few leaders can indicate the overall trend and mood of the entire industry. Fundamental industry trends are shaped by media publications, legislation, catalytic events, and other factors.
The overall health of an industry/sector can affect the success of a particular stock within it. For example, cybersecurity is a growing industry and some stocks in this industry may be strong simply because they are in a promising sector.
A professional approach for determining the share price
The more professional approach is to look at the context and supply chain of the particular company. For example, what do Starbucks, Boeing, and Apple have in common? All these companies are linked through their suppliers. Samsung provides displays to Apple, communications systems to Boeing, and air conditioning systems to Starbucks.
When you invest, you start to follow the news about your company of interest, but in addition to their marketing strategy and expansion statements, companies are restrained by their production capacities, which are restrained by the production capacities of their suppliers. Hence, if you know that something has happened to a supplier, expect the focus company’s production to be affected.
So one way is to react to news about Starbucks, but a whole new level is to predict the changes in stock prices based on the news about Starbucks coffee suppliers.
When you see the whole picture, you can make more informed decisions.
For example, during the summer there has been news all around about the chip shortage on the market and how it affects electronic components providers. With this map we see that Apple uses processors from Intel and 5G modems from Qualcomm, which are all based on semiconductors. Thus we can make a conclusion that its production line will be affected.
If we understood what determines the price of a stock, we wouldn’t be surprised by recent titles like Apple Set to Cut iPhone Production Goals Due to Chip Crunch in Bloomberg and can predict a decline in revenues. We created a map of various supply chains to make those invisible connections noticeable to you ☝🏼
Wrapping up
Now you know what causes stocks to go up and down. Stock quotes change every day, and it is impossible to predict them with 100% accuracy. But knowing the factors that affect the business of specific companies allows you to navigate the stock market better, correctly interpret the news, and consciously choose assets.
Assessing the prospects for what drives a stock price, pay attention to the situation in the global economy, long-term market trends, and the impact of government regulation on the company's activities and its financial results. Also, take into account the opinion of analysts and based on supplier news about the issuer, but remember that in most cases, they affect the price of shares in the short term and do not always reflect the real state of affairs in the company.
FAQ
Let’s answer the questions associated with what makes a stock price go up and down.
What causes stock/share prices to change?
The main factor that stock prices move up and down is supply and demand. But if you want to know more details, you can read our material on this topic.
What determines share prices?
Share prices are determined by several factors, such as the number of outstanding shares, industry standards, and many other reasons that you can review in detail in our article.
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