How Are Stock Prices Determined?
Vinay is a beginner in the field of investing and decided to invest in the stock of a company named ABC which is into logistics. He wants to start small and parks Rs 1000 to buy 20 shares. He did look at the financials of the company before making the investment decision and the company looked fine. This happened in January 2020.
In February, the value of the stock remained consistent but it started to come down in March 2020 and reduced to Rs 500 by end of March. This stock price went down due to the government’s decision to impose a complete lockdown in the country. This impacted the operations of the company and thereby impacted its revenue.
Even though the stock price movement depends on the sell and buys orders in the market, other important factors come into play. If Vinay had known these factors, he would have been better prepared to face the uncertainties in the stock market. Let us understand the important factors that impact stock prices.
Factors That Affect the Stock Prices Directly
Both macroeconomic and microeconomic factors affect the price of a stock in the share market. For example, due to the control measures and the travel restrictions implemented by the Government of India to contain the spread of Covid-19, the price of the aviation, hotel and related stocks took a big hit last year.
However, as the restrictions were slowly lifted, most of these stocks started to perform better. Most of the stocks have improved nearly 70-75% due to increased vaccination drive and re-opening of the Indian economy by the Government. Thus, if you are a first-time investor looking to make a good investment, you must understand the factors explained below:
Traders and Investors influence the price of a stock. However, their influence is dependent on the company fundamentals or the market buoyancy. This means that if the market is showing an uptrend or a particular stock is in focus, then all the stocks in that particular sector go up.
Similarly, the volume of the shares available for trading also impacts the price movement. The prices of certain stocks do not show much movement due to lack of liquidity i.e. a lack of buyers for the sell orders awaited. For example, the stock price of Yes Bank fell as there were no buyers for all the sell orders that were placed.
Policy and Regulatory Changes
Policy or Regulatory changes imposed by the Government have an impact on the movement of the stock. For example, the yearly budget announcement may impact specific sectors or the entire stock market. Say, if the Government of India increases FDI in insurance, it will impact the listed insurance stocks.
Also, any regulatory change will also impact the price of the stock. For example, if SEBI or The Securities and Exchange Board of India announces something related to futures trading in Gold that favors investors, the stock prices may show a positive trend.
When a new political party comes to power, it may have a considerable impact on the stock prices as well as the overall market. Similarly, a change in a political party resulting in a change in Government abroad too may have an impact on the stock prices. In both scenarios, it could lead to economic and policy changes that could have a positive impact on retail investors and businesses.
The management profile of a company and the experience of its leaders affect the stock prices. Any commentary or announcement by the top management may have an immediate impact on the stock prices.
For example, if the ITC management decides to increase the price of its products, the stock price will go up as this will signal an increase in the company’s revenue. This may improve the financial performance of the company which will result in higher dividend payments to its shareholders.
Natural Disasters are known to cause panic and chaos amongst the masses which results in a market crash. Shareholders end up selling their shares due to the fear of losing their hard-earned money. This leads to price correction in the market. For example, many foreign institutional investors withdrew their money from India due to rising Covid-19 cases affecting the Indian economy.
Along with the factors mentioned above, the internal factors of a company play an important role in determining stock prices. These factors are bonus announcement, dividend announcement, stock split, etc. They trigger the prices to rise momentarily and later correct or vice-versa.
Similarly, any rumor about the company regarding fraud or an illegal practice may result in a fall in stock prices. Also, any news of acquisition or merger will also impact the stock movement. However, the direction of price movement will be decided based on whether the news will benefit the company and its future growth.