Why Do Stock Prices Change?

Factors That Affect Share Prices In The Stock Market

Now that the ‘how do stock prices change’ question has been addressed. The next logical question is: why do stock prices change every second? 

Investors who can identify the factors that drive the stock prices are better placed to balance their portfolios. 

Investor, as well as market sentiment, drives the demand. That is, the perceived risk-return reward of investing in stock along with some external conditions drive the stock prices. Here are the key factors that influence stock prices.

1. Company-related Factors

A share is ownership in the company. Hence, any positive or negative company-related news can impact the price of its stock. These include:

• Any announcements of financial performance of the company or predicted future earnings
• If the company declares dividends, rights, or bonus issues, it impacts the price of its shares
• Launch of a new product or the recall of a product
• A tie-up, merger, or takeover
• A significant change in the management of the company
• Any scams or scandals involving the company
• Layoffs or a major hiring spree

2. Industry-related Factors

Industry-related factors can either be positive or negative for the share prices of all the companies operating in an industry.

For instance, Government’s announcement on production linked-incentive schemes in automobiles is beneficial for all auto-makers in the country. Therefore, upon the announcement, the share prices reacted positively.

Let’s take another example. Reliance Jio came into the market in 2016 with free voice and internet for all of its subscribers. The scheme extended for a year. This not only eroded the customer base for other telecom players but also their financial performance. As a result, the share prices of existing telecom players fell.

Such industry-related factors can lead to a share price fluctuation. It is one of the important factors to be considered before investing in any stock. 

3. Market Trends

You might have heard two terms repeatedly with respect to the stock market – Bull and Bear. These are not events but trends or phases causing a stock market fluctuation. 

• Bull phase – This is a market trend where investors are optimistic about the future of the market. Their confidence in the economy is also strong. Hence, they tend to invest more leading to an overall increase in stock prices across all sectors.
  
  
• Bear phase – The opposite of a bull phase. In a bear phase, investors are worried about the future of the market and are uncertain about the economy’s growth. A good example is the current pandemic crisis where there was uncertainty on economic recovery. Hence, stock prices fell in March across all sectors.
  

Also read, Bull vs Bear Market: What are the Differences?

Market trend affects companies regardless of their performance. These trends are usually rooted deep in some economic changes and can last for a few months.

4. Economic Factors

These factors can be analyzed, studied, and understood to make investment decisions for your benefit. 

• Geopolitical Factors

Macroeconomics is the study of the behavior of an economy due to factors that impact the population as a whole and not individuals. In macroeconomics, geopolitical factors play an important role.

If there is an earthquake, then the country’s ability to produce and distribute goods can get affected. Also, it can cause physical damage to the infrastructure that would need time and money for repairs.

Hence, such an event can impact the economy and in turn the stock markets. There are various macroeconomic factors that impact stock markets including upcoming elections, war, civil unrest, natural disasters, and political instability. 

• Microeconomic Factors

Microeconomics is the study of individuals and companies due to factors that impact them. It does not take the overall economy into consideration.

Some essential microeconomic factors are the spending power of the customers of a particular company, availability of efficient distribution channels, availability of manpower, competitiveness in the segment, and availability of income for consumers. 

These factors determine how a company performs regardless of the way the economy is moving.

Hence, even if the economy is booming but a certain sector does not have efficient distribution channels or availability of liquidity in the hands of the consumers, then the sector will suffer leading to a drop in stock prices of all companies in the sector.

• Inflation CPI

Inflation is a term that we use regularly without realizing its impact on everything around us. This includes stock prices. CPI or the Consumer Price Index measures retail inflation. It collects information about the changes in the price of the most common goods and services and computes the average cost of living in the economy.

The CPI is an indicator of the spending power of an individual. If inflation increases, it means the prices of goods/services are rising.

Now, if the individual’s income doesn’t rise with inflation, then spending or consumption takes a hit. And as a result, directly impacts the performance of certain companies like consumer durables. This in turn negatively affects the stock price. 

• MPC Interest Rates 

The Monetary Policy Committee (MPC) of India determines the borrowing and lending rates in the country. If the borrowing rates increase, then companies have a higher debt expense leaving fewer funds for growth and expansion.

This can impact the future cash flow of the company and lead to a drop in share prices. While a gradual increase in interest rates is considered healthy, a sharp rise can hurt businesses. This can be sector-specific too.

For example, an interest rate hike can benefit the financial services sectors causing a rise in stock prices. Overall, interest rates are one of the most important factors that impact the stock market.

• GDP

GDP or Gross Domestic Product is the total amount of goods or services produced by an economy. In layman’s terms, GDP is an indicator of the health of an economy.

Usually, a strong GDP growth means businesses experience better earnings and indicates a positive economic outlook. Hence, investor confidence is high and stock markets surge. However, since GDP is an indicator of how the economy performed in the past, its impact on stock markets is not as severe as the other factors.