 What Affects Stock Prices?
Stock market prices are affected by business fundamentals, company and world events, human psychology, and much more.
Introduction
Stock market prices are affected by business fundamentals,
company and world events, human psychology, and much more.
Stock trading is driven by psychology just as much as it
is by business fundamentals, believe it or not. Fear and
greed are the two of the strongest human emotions that affect
the market. For example, it is easy to get caught in the
trap of selling a stock prematurely because it dipped temporarily
and fear set in. On the other hand, it is also easy to miss
out on a respectable gain because greed was telling you
to hold out for more, and then the stock drops back down.
One of the main business factors in determining a stock's
price is a company’s earnings, including the current
earnings and estimated future earnings. News from the company
and other national and world events also plays a large role
in the direction of the stock market. Some examples of this
are oil prices, inflation, and terrorist attacks.
Every analyst and trader has a different perception of
what that stock price should be now and where it might be
in the future, and trading decisions are made accordingly.
Bad News or "Good" Bad News?
Layoffs
This is usually good for the company and its stock price
because expenses will be reduced significantly and quickly.
This should help increase earnings right away. It is not
always a major warning sign; it could just be a reaction
to a slower economy. It is one of the quickest ways a company
can cut expenses if sales have not been meeting expectations.Store Closings
This event often causes the stock price to go up for the
same reasons as layoffs. However, this is not always the
case. Closing stores actually requires a lot of money, and
the positive effects of it do not take place immediately.
This could be a sign that the company is truly in trouble
at the moment. They probably have lower sales and higher
expenses than they want, possibly due to a slowdown in the
industry or the overall economy. The good news is that their
management is being pro-active about maintaining profitability.
Unfortunately, the stock price may go down for the next
few months.Firing of CEO or Company Official(s)
This may sound very negative at first, but it does show
that the company’s board of directors was bold enough
to take drastic actions to help the company in the long
run. The stock price could go up or down after this announcement,
depending on the situation. In some cases this event could
be a sign of corruption that reaches beyond these individuals
and there could be more negative announcements to come.Market Scandals
Traders tend to frown upon corruption in the stock market.
Mutual fund scandals that have occurred in the past few
years and corporate corruption such as Enron are two such
examples. If people cannot trust the stock market, why would
they invest their hard-earned money in it? In these situations
it is harder for the market to go up because there is a
lower demand for stocks.
Analyst Recommendations
Many traders rely on experts' opinions about companies
and future stock prices. Are they always correct? Of course
not. Nobody can predict what will happen in the future.
They can, however, make educated guesses based on past performances
and future prospects for the companies and industries they
follow.
Round Numbers
Traders often like nice round numbers for their perceived
stock price, such as $10.00 or $35.00. It is common for
prices to settle near these round numbers, at least briefly.
Also, many traders place automatic buy or sell orders right
near these round numbers, causing the stock price to become
slightly erratic when it first reaches that target.
Technical Analysis
One of the most popular methods for helping predict a stock's
price, at least in the short term, is called Technical Analysis.
This method involves looking for patterns or indicators
in stock prices, volumes, moving averages, and many others,
over time. Obviously nobody can predict the future but this
method can be effective in many cases because human beings
are somewhat predictable. For example, when people see a
stock start falling dramatically they often panic and sell
their positions without investigating what caused the fall.
This causes even more people to sell their shares and this
often leads to an "overshoot" of the stock price.
If you believe the price went too far down you can try to
buy it at the bottom and hope that it will come back up
to a more reasonable level.
Another common example involves Moving Averages. Many traders
like to chart the 50-day and 200-day Moving Averages of
their stock prices along with the prices themselves. When
they see the current price cross over one of these Moving
Averages on the charts it can be an indicator of a change
in a long-term trend and it may be time to buy (or sell)
the stock.
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