Factors Affecting The Price Of The Stock

The change in the price of the stock is usually determined by a lot of factors. But the most important factor affecting the price of the stock is the seller's supply and the buyer's demand. In a situation whereby the number of people interested in buying a stock is far more than the number of those who want to sell, there would be limited availability of stock and the price would skyrocket. In this kind of situation, the demand for the stock exceeds the supply. If the reverse is the case, the price of demand would fall. Here, the supply is more than demand. If the supply and demand remain stable without anyone outweighing the other, the price of the stock is likely to remain stable. This is how the stock pricing works in the stock market. 

Hence a change in the demand and supply of stock automatically affects the price of the stock. However, irrespective of the important role played by demand and supply in the rise and fall of the price of a stock, there are some factors that trigger this. These forces can be designated into four categories: fundamental factors, technical factors, economic factors, and investors' sentiments. These factors would be explained based on how they trigger the rise and fall of the supply and demand of the stock.

Fundamental Factors That Affect The Rise In The Supply And Demand Of Stock

The fundamental factors affecting the rise of the price include the combination of :

• An earnings base used in calculating earning powers. For instance, earning per share(EPS) and the fund from operation (FFO)
• A valuation multiple, such as P/E ratio

When a stock investor buys common stock, he or she automatically has a proportional share to an entire future stream of earnings. This future stream of earnings is known as earning per share (EPS). Earning per share is the stock owners' return on investment. Every owner of common stock is entitled to the EPS. This is what is used to determine the valuation multiple. 

The profit made through the future stream of earnings is usually divided into two parts. One part of the earnings is distributed as dividends while the other part is retained by the company and used for reinvestment on behalf of the stock owner. In this way, the future earning stream functions as both the current earnings and expected growth in future proceeds. To understand how this work, explanation of how these two earnings are measured would be examined: 

The Earning Base

The earning base is the amount an investor is entitled to earn as part of the future earning streams. This amount is usually calculated using the earning per share (EPS) method. Earning per share is an accounting system that is used to illustrate the stock earning base. However, aside from the EPS, there are other methods that can be used to measure earning power. One of these methods is the cash-flow based. Cash flow-based is often rated as more effective and superior to the EPS 

One important factor that determines how earning base is measured is the type of company being analyzed. This is because many industries like the Real Estate Investment Trust (REITs) have their own specific metric used in measuring earning power. The earning power adopted by REIT is known as funds from operations (FFO). Aside from REITs, other relatively mature companies use the dividend per share to measure their earning power. 

The Valuation Multiples

Valuation multiples are an amount charged by the company or industries on behalf of the future stream of income. The amount that would be charged as the valuation multiple is usually calculated based on the discounted present value of the future earning streams. As such, this can be used to determine future expectations.

In determining the discount rate on future earnings, it is important to note that when the valuation multiple is high, it suggests a higher growth rate of the stock. However, when it is low, this could be indicative of a lower multiple. 

One of the major factors that determine the discount rate is perceived risk. The risk level of the stock can affect the discount rate that would be gotten from the stock. A very risky stock would earn a higher discount rate but low multiple valuations. Another factor that affects the discount rate is inflation. In a period of high inflation, the discount rate is high and the multiple valuations are low. 

From the above explanation, it can be inferred that the major forces that determine the fundamental factors include:

• The earning base arrived at using any of the methods for calculating earning powers such as earning per share, cash flow per share, and dividends per share. 
• The growth expected in the earning base
• The discount rate which can be affected by the level of stock risk and inflation

Technical factors

Aside from the fundamental factors, there are some technical factors that can trigger changes in the price of stocks. Technical factors such as industry trends, liquidity, and news can affect the changes in the price of stocks. Technical factors are a combination of external conditions that affect the availability of stock and in turn the price of the stock. The technical factors we have to include:

Industry Trends

Industry trends are great technical factors that can affect the price of the stock. When the value of a stock is getting higher and higher, it becomes popular. As popularity increases, it begins to trend. In this way, the success of the stock keeps breeding more success. However, there is a possibility that the rise in the popularity of stock can revert the value of the stock. This is why the way trends affect the price of the stock is not easy to decipher. 

Liquidity

As important as liquidity is to the price of a stock, it is usually undervalued. Liquidity refers to the value of interest a stock attracts from investors. Stocks with high liquidity attract more investors than stocks with low liquidity. 

News

News plays a major factor in the rise and fall of the price of the stock. A piece of bad news surrounding the stock in a particular country can affect the reaction of investors in other countries. News on the political situation of a country, product breakthrough, negotiations between one country and another can influence the decision of investors. Aside from this, news revealing a significant profit in a particular stock, a new product launch, or even the death of a prolific investor can affect the demand and supply of stock. News is a major technical factor that affects the price of the stock. 

Investors' Sentiment As A Factor That Affects The Rise And Fall Of The Price Of The Stock

Investors' sentiment refers to the individual and collective psychology of the investors in the stock market. Investors' sentiment is very different from the other factors because it is subjective and often biased. For instance, you can make a great judgment about the future of a stock and the future may eventually confirm your judgment. But prior to the actualization of your predictions, the news on the stock might dwell on single information that keeps the stock artificially high or low. As a result of this, you can end up waiting for a long period of time before other investors notice the fundamentals. In some situations, investors might not even notice. 

The effect of investors' sentiment on the price of the stock is usually examined by behavioral finance. In behavioral finance, the ideas that influence the sentiment of investors are investigated. Most results of the investigation revealed that investors tend to react more to lose than to gain. Investors sentiment can influence these two occurrences in the stock market:

Bear market: This refers to situations whereby the value of the stock is suffering a decline and the investors' sentiment is generally low and unencouraging. Bear markets often happen in a period of recession and unemployment.

Bull market: This is the opposite of the bear market. Bull market refers to a situation whereby the value of the stock is rising and the investors' confidence is growing. This kind of situation is often tied to the period of economic boom and investors' optimism. 

Economic Factors That Can Affect The Price Of Stocks

The economic factor is a very important aspect to consider when looking at the factors that can trigger the rise and fall of market value. Although some economic factors have been considered among the technical and fundamental factors, others that would be considered include interest rate, economic appearance, and change in the economic policy. 

Interest rate

The interest rate of the stock can be lowered or increased to stimulate or stabilize the economy of the country. For instance, in a case whereby a company borrows some money to expand its business coverage, this debt can affect the price of the stock and the interest in the stock. In situations like this occur, investors might shy away from investing in such a company. While there is no vivid explanation of how the interest rate can affect the overall fall and rise in the price of stocks, it can affect the price of a stock in individual companies. 

Financial outlook

Investors are avid readers and researchers and tend to look out for signs that the value of stocks is about to go up. When a stock begins to trend report with tangible reports on the profit, investors rush the particular stock. This action can instigate the rise in the price of the stock.

Inflation

In the above explanation of the fundamental factors that can affect stock prices, inflation was mentioned. However, the effect of inflation on the stock market is not limited to fundamental aspects alone. Inflation is a huge driving force in the economic factors that affect stock prices. Historically, when inflation is low, multiple valuation increases but when inflation is high, multiple valuations are low. Deflation, which is the opposite of inflation, is generally bad for the stock market. Deflation basically signifies a loss in stock value for companies and industries that sell the stock. 

The Economic Ability Of The Stock Market 

The economic strength of the stock market is another technical factor that can affect the price of the stock. The price of a stock in companies and industries is majorly determined by the price of the stock in the stock market and sectors. This is why the stock market is often rated as the basic factor that determines the price of the stock 

Political And Economic Change

A universal change around the world can affect the price of the stock. For instance, the current COVID-19 pandemic ravaging the world today has had a great effect on the price of the stock. Aside from this, a rise in energy costs can lead to lower profit, lower sales, and lower stock prices. 

Change In The Economic Policy

A new government can come up today to change the method of operation of the previous government. Changes like this can affect the price of the stock.

Competition

On the global stage, companies usually compete for assets with other investment dollars. The other assets that are competed for include: government bonds, corporate bonds, real estate, commodity, and foreign equities. This competition can play a major factor in the price of the stock. 

Spontaneous transactions

Most times, the sale of stock is determined by factors that are not related to the intrinsic value of the stock. In a situation like this, the sales of the stock are referred to as incidental or spontaneous transactions. Spontaneous transactions can be instigated by factors such as portfolio objectives. A good example of this kind of transaction is executive insider transactions, transactions by institutions to hedge some other investment. Usually, these transactions are not included in the official vote cast for or against the stock, but they have the ability to influence the rise and fall in stock price.

Demography

Most times, research is carried out on the demographic of investors. In a situation like this, the concentration is often on middle-age investors and older investors. Research on the demography of older investors would be used to determine the statistics of those who are likely to pull out of investment as a result of retirement. While research on middle age would be used to determine peak investors who tend to invest in the stock market. 

The hypothesis that is often arrived at is that the greater the proportion of the middle-aged investors, the greater the demand for equities. This inadvertently increases the rate of valuation multiples

Summary 

The factors examined above play a huge role in the rise and fall of the price of stocks. Also, how factors affect investors varies. On the one hand, short-term investors and traders tend to prioritize technical and economical factors as the major factors that determine the rise and fall of the price of stock. On the other hand, long-term investors prioritize fundamental and economic factors.