How are Stock Prices Determined?

What Factors Do Stock Prices Directly Depend On?

Both micro and macroeconomic factors impact the price of a stock. So if you are a first-time investor looking to make an investment, you should understand factors that affect the stock prices to better time your investment in the stock market. 

The stock market in India is highly volatile. How share price is decided depends on many factors, including:

1. Liquidity 

Liquidity refers to how easily shares can be bought or sold. When there is high liquidity, it's easier for investors to sell their securities. Liquidity also affects the prices of stocks because investors are more willing to buy them when there are many buyers and fewer sellers. 

Investors and traders themselves influence the price of a stock. However, their influence predominantly depends on the fundamentals of the company or the market buoyancy. That is, if the market is up or if a particular sector is in focus, then generally all the stocks in that sector generally go up.

Similarly, the volume of the shares available for trading has a call on the price movement.  There are a few stocks in the market whose prices may not move much; this is predominantly due to a lack of liquidity. There is a lack of buyers for the sell orders awaited.

2. Policy and Regulatory Changes

Policy and regulatory changes impact the stock market because they can change laws that affect how companies do business. Government policy or regulatory changes or implementation to have an impact on the stock movement. For instance, Government budgetary announcements can impact either the entire stock market or could impact specific sectors.

Say, if the Government increases Foreign Direct Investment in insurance, all the listed insurance stocks react immediately.  Similarly, if there are any regulatory changes, then that too will impact the stock price.

3. Political Scenario

Another factor that affects stock prices directly in India is the political scenario. If there are any changes in government policies related to business, there may be some fluctuations in the market as well due to uncertainty about future changes in policy. 

A new political party coming to power to form a Government can also have an impact on the stock prices and the overall market. Same way, political party change resulting in Government change in foreign countries too can have an impact. This is because, in both cases, it could mean policy and economic changes that could favour the business and retail investors. 

4. Management Commentary 

A company’s management profile and the experience of its leaders affect stock prices. The management commentary or announcement could have an immediate reaction to the stock prices.

For instance, if Asian Paints’ management decides to increase their company’s product prices, then usually, the stock price goes up, as this could mean an increase in revenue for the company.

And thereby could improve the financial performance, which can result in higher dividend payments to the shareholders.  

5. Natural Disasters

The stock prices of India's companies are closely tied to the economy of the country. The economy is affected by numerous factors, including natural disasters.

When there is a natural disaster in India, it can have a major impact on the economy as well as the stock prices of companies within it. Even though there are many factors that affect stock prices directly in India, natural disasters often have an impact on them.

It has an impact on the stock market because it affects business activities and therefore results in lower demand for goods and services.

Natural disasters such as floods or earthquakes can have serious consequences for businesses in India due to their reliance on infrastructure and systems that may not be able to withstand such events without interruption (such as electricity). 

6. Other Factors

Apart from the above-mentioned factors influencing a company’s stock prices, there are the company’s internal factors too that play a role. These factors include dividend announcements, bonuses, rights or spilt of a share that triggers the prices to rise momentarily and later correct or vice-versa.

Similarly, any rumour or whistle-blower news about a company where there is fraud, or there is a likely default could negatively affect the stock prices.  Any merger or acquisition deal too will affect the stock price. However, the change will depend on how it benefits the company and its future growth and shareholders’ value post the deal.

You may also want to read Why Do Stock Prices Change?

Conclusion

Throughout their history, stock markets have outperformed every other financial instrument. Participating in the stock market can be profitable if you choose your investment wisely. The price of a stock can change depending on the above-mentioned factors.

So, if you ever wonder how to determine stock price, these factors can be considered the primary determinants for stock prices in India, where investors trade stocks worth thousands of crores on a daily basis.

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.