What Drives Stock Prices?
Stock prices are driven by supply and demand. If there are more buyers than sellers of a stock, its price will rise. Conversely, if there are more sellers of a stock than buyers, its price will fall.
Supply and demand for a stock can be influenced by a number of factors. These include:
- Company news
Any news surrounding a company will affect demand for its stock. Good news tends to increase demand, while bad news, or any news that increases uncertainty, tends to decrease demand.
For example, if a company announces that its quarterly profits are higher than the figure that the market was expecting, demand for its stock is likely to rise, pushing its price up.
However, if a company announces that it is experiencing operational problems and that its quarterly profits will be lower than the market was expecting, demand for its stock is likely to fall, pushing its price down.
- Competitor news
News in relation to a rival company can also impact demand for a stock.
For example, if one company in the automotive sector reports strong annual sales, it may boost demand for other automotive stocks.
- Analyst upgrades and downgrades
Analysts at investment firms such as Goldman Sachs, Citi, and Morgan Stanley regularly provide ratings on stocks. These ratings reflect the expected performance of a stock over a given time period. Three common ratings are ‘buy’, ‘hold’, and ‘sell.’
If an analyst upgrades or downgrades a stock, it can influence demand for the stock. For example, if a major Wall Street firm suddenly upgrades a stock from ‘hold’ to ‘buy’, demand for the stock is likely to increase.
- Economic and political news
Economic and political developments can also drive demand for a stock. News in relation to interest rate changes, inflation data, unemployment figures, and political turbulence can all influence investor demand.
- Investor sentiment
Investor sentiment refers to the overall feeling that investors have about the stock market. This can have a large impact on supply and demand for stocks.
If investors are feeling confident (bullish) that stocks are likely to rise in the future, demand is likely to be high.
However, if investors are concerned about market conditions and believe that stocks could fall (bearish), demand is likely to decline.
Reprinted from eToro, the copyright all reserved by the original author.
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