What Determines Stock Price?

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Stock prices change everyday as they are affected by a number of different market forces. At their most fundamental level, stock prices fluctuate because of supply and demand. If more people want to buy a certain company stock (demand) than sell it (supply), then the price moves higher. Conversely, if more people wish to sell a stock than buy it, supply is greater than demand, and this causes the price of the stock to drop.

What can affect supply and demand?

Understanding supply and demand is relatively easy. A far more challenging task however, is to understand what makes investors go after a particular stock and sell another one. The principal theory is that the popularity of a stock relies on what investors feel that the company behind it is worth. Taking it one step further, the price of a stock doesn’t only reflect a company’s current value, it also reflects the growth that investors expect the company to have in the future.

Earnings reports

Perhaps the most important factor that affects the value of a company is its profits or quarterly earnings. Public companies are required to report their earnings four times a year. Investors watch these earning reports as they can give them clues on future company performance and value. If a company’s results are better than the analysts had anticipated, the price jumps higher. If a company’s results disappoint, then the price drops.



News and product releases

Of course, it’s not just earnings that can change the sentiment towards a stock. Prices are also affected by news surrounding the company. If a tax evasion scandal emerges for example, it could push stock price lower. News on the company’s debt levels or any major changes in management also tend to greatly affect stock price. What is more, product releases can affect stock price as well. If a product is well received by consumers, the stock price tends to move higher. A faulty product can conversely affect stock price in a very negative manner. When Apple releases a new iphone for example, massive stock price fluctuations are recorded.

So, why do stock prices change?

Stocks can be volatile and can change in price extremely rapidly. These changes however, are not always attributable to a single reason. As we have established in this article there are many factors that can affect stock price and the more familiar you are with the company the easier it becomes to recognise the data and events that could affect its stock price.

Sources: CNBC, Investing.com

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