Everyone wants to increase their wealth. But it is essential that you have the basic information before investing in stock market. If you do, you will have higher chances to maximize your profit ratio. Before investing anywhere, you should have understanding about the basics of the company, where you would like to invest; including their business model and past results rather than depending on tips from so called “experts”. Many investors willing to buy stocks of a company, they hear from friends, colleagues and so called “stock gurus”. But if you do not have the basic understanding about the company, you’re probably going to see loss on your way. Buying stocks blindly means that you accept that risk of failure. To reduce that risk, it’s up to you to do, in depth research about the stock whether the stock is as good for investment as you think.
When you buy a share or stock, it means you’re buying part of ownership in a company. By owning stocks you can make your money work for you, although it involves risk but it also a signal that you’re taking your finances seriously. On previous article, we have already told you pros and cons about investing in stock market. When you invest in stocks, you are expecting the price of the stock to increase over time. There are a huge number of factors that can cause the stock market to move from one direction to another. But now the question is how will you know when stock prices increase or decrease. In this article we are going to discuss about those key factors.
1. Supply and Demand: Stock price changes everyday by market forces. So, obviously the price of shares change because of fluctuations in demand and supply. If people want to buy a share more than sell it, then the stock price will increase. Lets say that you want to by a share of XYZ Limited for Rs. 100 (which is demand), if anyone who already has the share wishes to sell it at Rs. 100 (which is supply) then the price does not increase. However if no one is willing to sell that share for Rs. 100 then you have to bid for higher price. Likewise if more people want to sell it more rather than buying, then the price will fall. If we invert our example and say that you want to sell the share at Rs. 100 and no one willing to buy more than Rs. 90 then you must decrease the selling price, which will drive the stock price to go lower. Supply and demand is a reflection of the value of a company in stock market. Demand and supply is the key reason for frequent changes in share price.
2. Industry Performance: Generally stock prices of companies in the same industry will move back to forth with each other. The reason is that the market conditions generally control the companies in the same industry in same way. For an example when news was coming up that sells in auto sector in India have declined, almost every automotive (car, motorcycle etc manufacturing) company’s share price fell, as it was an industry specific crisis.
3. The news: Economic news and business events can change the price of a stock. The unexpected news that benefit or harm the company will turn the company’s stock price up or down. The positive news encourages investors to buy the stocks, likewise negative news results the drop in stock price. Certain internal and external confidential information leakage can also affect share prices. If any information leaks out in public that financial conditions of a company is not well and it might go bankrupt, then it will lead the stock price of that company to decline which happened with Reliance Communication in India. Chasing the news is not a good stock-picking strategy for individual long term investors. Government’s economic reports are represented as news as they suggest the strength and weakness of the economy, including key industry sectors. Also quarterly financial reports indicate the company’s performance in recent months and may give clues for the near future.
4. War/ Natural Destruction: War is totally opposite to economy or business, so natural destruction are like earthquake, tsunami, flood etc. If any global events like unexpected destruction happens then it’ll definitely affect the stock market. As it is becomes hard to trade or run business operations during any type of man made destruction or natural events such as earthquake. Recently Sensex and Nifty was down because U.S - Iran geo political tension. The global crude oil price jumped high as Iran is a large supplier of crude oil, and any war or such situation will hamper the country’s capability of supply. And this is not good sign for investors. Right now due to Coronavirus most of the world is under complete or some kind of lock down, therefore it is impossible to trade or run businesses properly. Hence most of the stock market and stock prices are declining.
5. Inflation: Inflation means the rise in the price of goods and services over a period of time or loss of value of the currency. Increasing inflation often decreases the purchasing power and reduce profit. Rising inflation has an harmful effect like higher prices of consumable goods or services, so consumers can buy fewer goods and companies can generate less revenue, and profit. The economy slows down for a time until a measure on economic stability is taken by the government. Historically low inflation drives high consumption and high inflation drives low consumption. Lets take an example here, your monthly income is Rs. 100, and you spend Rs. 10 to buy 1kg apples. Now if the apple price increases due to inflation and becomes Rs.25 per kg, you will either buy less apples or stop buying them. Which will hit apple production industry.
6. Deflation: Deflation is when the inflation falls below 0%. Deflation is generally bad for stocks because it indicates a loss in pricing power for the companies, which reduces economic activity. Stock prices may start to fall and investors may start selling their shares and move to fixed-income investments like bonds, bank deposits etc. In this situation the government usually lowers the rate of interest to encourage people to consume more, which is the the main purpose is to encourage people to spend money and increase economic activity. Lets say that it costs Rs. 3 to produce a kg of apple and you eat 1 kgs of apple every week. Now, due to deflation the requirement of apple consumption might increase a bit, however it will not be unlimited as we cannot eat 10 kgs of apples in a day, so the consumption will still be limited. Due to over production and deflation if the price of apples per kg becomes Rs. 1 then the apple farming industry gets hit hard as they have to sell on loss.
7. Financial Result: The price of a stock not only reflects a company’s current value, but also reflects the growth prospect that investors expect in the future. One of the most important factor that affects the value of a company is, its earnings. Earnings are the profit which a company generates. If a company never makes money, it isn’t going to stay in business for long period of time. Public companies are required to report their earnings four times a year (quarterly basis). If a company keeps posting loss in its every quarterly results, the stock price will decrease eventually unless the company makes a turn around.
8. Global queue: If major markets and stocks around the world is performing well or vice versa, it will have impact on stocks and other stock markets. In general if previous day US markets incline, then we are likely to see rise on Indian and other stock markets as well. If we can remember that the 2008 recession started from United States and impacted almost every country and stocks during that period of time. Economy is like a chain, it will always have domino effects on other stocks and stock markets as well.
9. Liquidity: In simple word, liquidity means how much money and asset a company has, the more it is the better. Liquidity is a valuable factor for price fluctuation. If company does not have much of cash in hand or assets at its disposal it will not be attractive to investors to invest in that company. As any company can see dark days due to various reasons including competition, economy etc. If a company does not have much fallback asset, then investing on that company would very dangerous. If suddenly a company reports that half of their assets have reduced then the stock price will start decreasing, simultaneously if suddenly a company informs that their liquidity has doubled the stock price will rise.
10. Interest Rates: Interest rates have an effect on price movements in the financial market. In case of lower interest rates, demand for funds increase so do upcoming demands for share price. On another side, high interest rate lowers the demand for funds and the demand for shares decreases, therefore stock price decreases. Lets say if banks cut their interest rate for businesses and individual customers that means the businesses and customers can avail more loans. Which lead increase of production for the business and increase of consumption for the customers. However if interest rate increases, in that case business and customers will avail less loans, so the production and consumption will decrease.
11. Management: The management profile has a great effect on company’s success and share price movement. If a company appoints or run by good management then the stock price start to rise as investors gain more faith to invest more, due to management's goodwill. If a good leader or management team leaves a company the stock price start to fall as investors get skeptical about the company’s future. As an example right after Mr. Steve Jobs left Apple and Mr. Narayana Murthy left Infosys, companies stock started to fall over the period of time until both of them returned.
12. Dividends: When companies make dividend announcements, the share prices of such companies are likely to increase. Usually investors start buying shares in order to avail announced dividends which leads the stock price to rise. It is necessary to observe that if the announced dividend rate is lower than the investors’ expectation, share price may decrease. If the dividend is more than investor’s expectation, share price will increase.
13. Import and Export Cost: The value of currency and import and export costs are linked with price movement in financial market. Sometimes governments bans or increases import or export duties on certain products in order to protect domestic demand or market. When there is an increase in import or export costs, the stock price related to that particular industry starts to fall, as the cost of product increase. If governments withdraw import or export duties the stock price related to those industry start to increase, since cost of product decrease therefore consumption increase. Recently US government increased import tariffs on Indian motorcycles and cars which impacted Indian auto industries and stock prices of Indian auto manufactures fell.
14. Rumors: Rumor means circulation doubtful information. Some unethical investors and traders sometimes spread rumors in order to increase or decrease certain stock price for their own benefit which is a way of manipulating the stock market. Naturally, the victims of these rumors are ordinary investors who wish to achieve quick profit by believing in those rumors without doing any research. For an example if a group of people is able to spread rumor, that all plants except one of a reputed company have been shut down, then the stock price of that company will start to fall. Investors and Traders are strongly advised not spread any kind of rumor as it is a punishable offense in every country.
15. Stock Prediction: Prediction is an essential part on price fluctuations in the financial markets. That vary from market to market, from one investor to another and from one industry to another. The key mission of investors to increase their wealth and decrease their loss. If large number of investors predict, a stock’s price will rise in immediate future then they start buying that stock which will lead increase in stock price. Similarly if large numbers of shareholders believe a stock price will fall in immediate future, then they start to sell their shares in order to book maximum profit or avoid loss. Which will lead to decline in stock price.
16. Unique Invention: If an unique invention is made by a company then it’s stock will be in higher demand in stock market. Then more people want to buy the shares of that company. Lets say if a car manufacturing company announces that they have invented a technology which will run cars by water instead of fossil fuel, the stock price of that company will skyrocket.
17. Political Stability: Another reason of stock price change is political in stability. If a country has stable government the stock market will rise eventually. If a country does not have stable government, stock market will fall due to uncertain business future. In other words when a political party wins election in large mandate stock market start moving upwards. If a coalition government is formed then the stock market moves downwards.
Except above mentioned primary reasons, stock prices change for various reasons. While some investors believe that it’s impossible to predict the changes, others think that the past price movements and charts can reflect when the prices will increase or decrease. Although, there are many theories that explain why stock prices move. But the reality is there is no one theory that can explain everything.