Stock trading is a complicated endeavor when viewed from afar, but it becomes easier if you can get the hang of how to speculate on price movements. What you earn, your failures and your progress as a stock trader all depend on the accuracy of your price predictions.
But price movements don't happen by chance. There are underlying factors that affect how stock prices move up or down. This article will explain those factors and the driving force behind them in this article.
Principle of Demand and Supply
The primary driving force of price changes in any market is the economic law of demand and supply. The law of demand and supply says that the value of a product will go up if demand is higher than supply. But the price will drop when the supply is higher than the demand for that product.
Stocks represent fractional ownership of the company and entitle the holder to a portion of the company's earnings equal to how many shares they own. Stocks aren't physical products, but as long as they're sold, they're subject to the laws of demand and supply.
In the case of the stock market, people speculate on price changes either to sell at a near or later date or to hold the asset long-term. The basic principle is that if the buyers of a stock product are more than the sellers, this creates scarcity and drives up the prices. Conversely, if more traders are willing to sell their stock assets than those buying, this will drive down the price.
In simple terms, if prices are rising, it's because more people buy than sell. And if it's going down, it's because more people are selling than buying.
Now that we've got the basic principle down let's move on to the factors that spur these buying and selling decisions. What makes people want to buy or sell a stock?
Factors Causing the Rise and Fall of Stock Prices
As we've already established, stock prices rise and fall primarily due to buying and selling decisions. The second layer of stock price movement is the factors that influence buying and selling decisions.
These can range from a trader's sentimental perception of news and information from different sources. Below is a list of a few factors that determine if a stock trader will buy an asset or sell an existing one:
-
Positive and negative news
-
Company earning reports
-
Political events and government policies
-
Economic shocks
Positive and negative news
Before traders invest in a company’s stock, they usually research the company. For example, people would invest first in a company (A) they know has a good reputation and has been in business for years rather than buy stocks in an entirely new company (B).
If their investment is tied to company A, the trader would most likely stay updated on recent news about the company. Now, if they hear that Company A is having some internal management crisis or that they are making a questionable business move, traders would prefer to pull their investment pending a resolution.
If enough people sell at that time, it can negatively affect the price of that asset. But if it’s news of the company expanding into a new and promising market, the stockholders would have more confidence in the company and would even want to buy more units instead of selling.
Positive business news often equals higher demand, while negative news causes more people to dump their positions. Other forms of company news that can influence trader decisions are management change, the introduction of a new product, employee layoffs or mass hiring, etc.
Company Earnings
Nobody likes to fail or associate with failure. Not the business owners and certainly not the stock buyers. It’s the assumption that if a company exists, they intend to make profits.
Traders like to associate with money-makers, so when a business starts making consistent losses without an appearance of a counter strategy, it weakens the trader’s confidence in that company. In the same way, if the company celebrates profits, it’s a sign that the business is doing well and it isn’t going down soon.
Traders will be more inclined to buy stocks of a company that earns profits over one that isn’t making any money. That said, there are special circumstances where a company earning less doesn’t affect the buyer or seller's decisions.
In the case where a company has built enough social capital, its stock buyers would be more loyal to them and would be slower to sell off assets. The company would have built a strong track record of consistently bouncing back or being able to make profits in no time.
Political Events and Government Policies
Entire economies have been thrown into despair and some into prosperity by government policies and political events. Let’s take the recent 2022 war between Russia and Ukraine. At the time the news went around, traders started pulling out their money from Russian and Ukrainian companies.
Uncertainty about the post-war future made traders untrustworthy of the market and pulled out to safeguard their money. Such an event would have caused thousands of people to sell their stock assets and drive down the prices.
Also, if the government were to ban a certain product, it wouldn’t make sense for traders to hold stocks in a company that has been rendered inoperable. Traders would prefer to take out their money so they can watch from an inactive point of view to know what the reaction or consequences of the news would be.
Aside from that, a government can make blanket policies that affect the general market and weaken investor confidence. People will want to wait before taking a step so they’ll mass sell and cause a downward price movement.
Economic Shocks
Whenever an economy is going through a boom or recession, the stock prices respond similarly. During an economic boom, people will have more disposable income to invest in stocks.
More people will buy, and fewer will sell because they do not require immediate cash to settle bills. This would therefore drive up the stock prices.
On the other hand, when there’s an economic downturn, people wouldn’t have enough free money to invest in stocks for future profits. They may have immediate bills that need to be sorted and they wouldn’t be able to leave the stocks and starve.
They’ll have to pull out their investment to buy food, sort out medical bills, and care for their families. The decrease in buying activity and increase in selling would drive down the prices of a company's stock.
Stock prices either move up or down or remain stable. These price movements are due to the principle of demand and supply through various factors such as economic boom and recession, government policies, company earnings, and business news.
Whenever these factors come into play, big enough buy or sell orders in mass can either set the stock prices in a downward or upward trend. Either way, you must adjust your strategy to suit the changes and remember to trade stocks with caution.
