Why stock prices fluctuate?

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        World of Finance by M.Vijaya Sai

Stock market investment is a game Successful investing requires more than just a little bit of knowhow and a dash of luck. It requires a cool head, an analytical mind, and the ability to make quick money decisions. This is especially true when investing in the Stock Market. Investing naturally comes with a level of risk. The market’s activity fluctuates on a daily basis during the opening and closing bells.
Factors Affecting Stock Prices
There are two basic factors that affect the movements of stock prices.


  • Fundamental Factors


  • Fundamental Factors
Fundamental Factors
Following are the major Fundamental Factors which are affecting the price of stocks


  • Demand and supply


  • Market Cap


  • Earnings per share (EPS)


  • Price/Earning Ratio (P/E Ratio
Demand and Supply
Demand and Supply is the fundamental factors of economics, which holds good for the equity market as well. The price of stock is directly affected by the trend of stock market trading. When more and more people buy a same stock, the price of that stock increases and when more people are selling the same, the price of that particular stock falls. Normally it is difficult to predict the trend of the market but experts like Indianmoney.com can give you fair idea of the live trend of the market.
News
News is an important factor which affects the stock price. Positive news about a company can increase people’s interest in buying the shares. At the same time a negative press release can ruin the interest of people in buying that same.  After all it is the overall performance of the company that matters more than news.
Market Cap
How will you determine the worth of a company…..??? If you think it can be determined from the stock prices, then you are making a huge mistake. It is the market capitalization of the company that is more important when it comes to determining the worth of the company. Market Cap can be calculated by multiplyingthe stock price with the total number of outstanding stocks in the market and that is the worth of the company.
Earning Per Share (EPS)
Earning per share is the profit that the company made per share on the last quarter. This is the most important factor for deciding the health of a company. Every public company has to publish the quarterly report that shows the earning per share of the company. High EPS influence the buying tendency in the market resulting in the increase in price of that particular stock.
Price/Earning Ratio
Price/Earning ratio also known as P/E ratio helps you to get a fair idea of how a company's share price compares to its earnings. If the price of the share is very less than the earning of the company, the stock is undervalued and it has the potential to rise in the near future. On the other hand, if the price is higher than the actual earning of the company and then the stock is said to be overvalued and the price can fall at any point.
Technical Factors
Things would be easier if only fundamental factors determine stock prices. Technical factors are the mix of external conditions that modify the demand and supply of a company's stock. Some of these indirectly affect fundamentals. (For example, economic growth indirectly contributes to earnings growth). Following are the major Technical factors affecting stock price:


  • Inflation


  • Economic Strength of Market and Peers


  • Substitutes


  • Incidental Transactions


  • Trends


  • Liquidity
Inflation
Inflation is a huge driver from a technical perspective of stock market. Historically, low inflation had a strong inverse correlation with valuations. On the other hand deflation is generally bad for stocks because it indicates a loss in pricing power for companies.

Economic Strength of Market and Peers
Generally company stocks tend to follow the track of market and with their industry peers. Stock Market specialists say that the combination of overall market and sector movements determines a majority of a stock's movement.
For example, a sudden negative outlook for one oil stock often hurts other oil stocks and drags down the demand for the whole sector as "guilt by association"
Substitutes
Substitutes influence the price of stocks to a great extent. These include corporate bonds, government bonds, commodities, real estate and foreign equities. In any point of time if the investors are finding that the alternatives are giving more returns than equities, probably they will withdraw all the investments from the stock and go for alternatives, this will affectthe stock price very badly.
Incidental Transactions
Incidental Transactions include executive insider transactions, which are often driven by portfolio objectives. These are purchases or sales of a stock that are forced by something other than the intrinsic value of the stock. They do impact supply and demand and therefore can move the price.
Trends
A stock always moves according to a short-term trend in the market. On the other hand, a stock that is moving up can gather momentum. Sometimes stocks behave in the opposite way in a trend and do exactly opposite to the market.
Liquidity
Liquidity is a very important factor in determining the price of stocks. Liquidity refers to how much investor interest and attention a specific stock has. Some company’s stocks are highly liquid and therefore highly responsive to material news. Trading volume indicates both liquidity and a function of corporate communications.
Other factors affecting stock prices
Apart from those discussed above, there are many reasons for increase or decrease in price of the share. There are several stock factors affecting share prices. Stock Price does not depend upon one or two factors, but some factors directly influence the share prices. Major factors affecting stock prices can be broadly divided under following categories


  1. Economic Factor


  2. Company Related Factors


  3. Industry Related Factors


  4. Political Factors


  5. Social Factors


  6. International Factor


  7. Other Factors


  8. Short term factor

Factors
Components
Economic Factor


  • GDP Growth rate (Industrial Production, retail sales)


  • Inflation Rate


  • RBI Policy (including money supply)


  • Confidence Index


  • Risk Appetite


  • Employment / Unemployment rate
Company Related Factors


  • Profitability


  • Sales Growth


  • Return on Investment


  • Management
Industry Related Factors


  • Government Policy


  • Growth Rate
Political Factors


  • Any political change in the country
Social Factors


  • Culture and habit of the society


  • Attitude
International Factor


  • War


  • International economics


  • Policy of OPEC countries


  • International Stock Exchanges
Other Factors


  • New Invention
Short term factor


  • Rumors
There are hundred other reasons behind the rise or fall of the share price. Especially there are stock specific factors that also play its part in the price of the stock. So, it is always important that you do your research well and trade on the basis of your research.
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Comments

Multibagger stocks said…
This article has some great and useful information about this subject. Thank you for sharing it in an easy to read and understandable format. Thanks for sharing this great information.
April 19, 2013 at 5:44 PM
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