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Each share of stock in a publicly traded corporation, or one whose stock is exchanged on markets like the New York Stock Exchange and the Nasdaq, has a price. An investor owns a portion of the business for each share they purchase.
The price per share of a stock is mostly determined by supply and demand. The stock price often increases if demand for a constrained number of shares exceeds supply. Additionally, the stock price normally declines if supply exceeds demand.
Setting stock prices
William Haight, a director at Capital Choice Financial Group in Phoenix, said that the amount of a stock and how many people want it influence its price. “The price of a stock will increase if more people desire to acquire it. However, the price will decrease if more people decide to sell.
On the other hand, let’s take a look at RXYZ Co., a fictitious healthcare organisation. The stock might be trading at $45 per share on Monday. The next day, a Wall Street analyst publishes a negative report on the healthcare industry, which prompts some investors to sell their shares in RXYZ and causes the stock price to fall to $40 a share. That represents an 11% drop in one day.
What factors affect the share prices of listed companies?
Stock price variations are caused by a variety of factors, not just supply and demand. In actuality, a number of factors may combine to cause up and down swings in price.
Company activity
According to Haight, his increased demand may cause the stock price to climb. In contrast, if RXYZ reports poor financial results for the third quarter, investors may lose faith in the company and sell some or all of their RXYZ shares.
In addition, the following corporate events could cause a rise or fall in the stock price:
- grant of a patent for a novel and exciting commodity or service.
- international expansion’s launch.
- unexpected demise of the CEO.
- a significant client is lost.
The state of the economy
Investors may feel more optimistic about the path of the economy, for instance, if the U.S. Bureau of Labour Statistics releases data showing that the unemployment rate decreased and the nation added a significant number of jobs the previous month.
They might therefore be more motivated to invest in the stock market, which would raise the price of some companies’ shares.
Contrarily, poor employment and unemployment data may frighten some investors, triggering a stock sell-off that lowers share prices.
Inflation
As a result, investors may decide to sell some of their shares if the inflation rate is rising and they start to feel uneasy about the state of the economy. Investors may become more optimistic about the economy and increase their stock-buying activities, however, if the rate of inflation is declining.
Furthermore, a company’s financial performance could be negatively impacted by excessive inflation because purchasing goods and services will cost more. A company’s profits may be reduced by an increase in costs, which would deter investors and cause the stock price to fall.
Interest rates
The price that businesses pay to borrow money is significantly influenced by interest rates. High interest rates may increase the cost of company borrowing. As a result, company earnings might decline, which would lower stock prices overall.
In addition, stocks may not be as appealing as CDs, bonds, and other assets whose yields benefit from increased interest rates due to the higher interest rates on their stock market. Stock prices would decline if investors sold out.
Consumer spending
The Congressional Research Service asserts that “consumer spending is a key driver of short-run economic growth in the U.S. economy.”
The same holds true for company sales, earnings, and stock prices, which can all suffer from sluggish consumer spending.
World events
In 20 significant geopolitical crises, such as the attack on Pearl Harbour, President John F. Kennedy’s assassination, and the 9/11 terrorist attacks, between 1941 and 2020, the S&P 500 stock index declined on average by 5%, according to data from LPL Research.
According to IMF data, geopolitical risks between 1985 and 2020 caused a drop in stock returns ranging from 10.53% to 42.14%, which is consistent with this finding.
Major investors
Haigh remarked that changes in stock prices might be influenced by the behaviour of big institutional investors like mutual funds and hedge funds.These investors possess a lot of shares, so their buying and selling activities can have a big impact on stock prices, he said.
Why do stock prices change every second?
Investors may decide to purchase or sell a company’s stock when they learn new information about it, according to Haight. “The stock’s price increases if more individuals purchase it. The stock’s price will decrease if more individuals sell it.
Lean on professional advice
Your broker’s financial advisor can assist you if you’re unsure about what’s occurring in the stock market or whether to buy or sell shares. These experts can help guide you in the right way by attentively monitoring the ups and downs of the stock market.