It's important for investors to understand what drives stocks and the market up and down
Tim writes about technology and consumer goods stocks for The Motley Fool. He's a value investor at heart, doing his best to avoid hyped-up nonsense. Follow him on Twitter: Follow @TMFBargainBin
What can affect stock prices?
High demand for a stock relative to supply drives the stock price higher, but what causes that high demand in the first place?
The big picture is what matters
Long-term investors, like those of us at The Motley Fool, don't much care about the short-term developments that push stock prices up and down each trading day. When you have many years or even decades to let your money grow, things such as analyst upgrades and earnings beats are irrelevant.
How to determine the value of a stock?
The important things to grasp about this subject are the following: 1 At the most fundamental level, supply and demand in the market determine stock price. 2 Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless. 3 Theoretically earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes, and expectations that ultimately affect stock prices. 4 There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.
What is the most important factor that affects the value of a company?
The most important factor that affects the value of a company is its earnings . Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, they aren't going to stay in business.
What is the value of a company?
The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding . For example, a company that trades at $100 per share and has 1,000,000 shares outstanding has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding ...
How often do public companies report earnings?
Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection.
Why does stock price go up?
The faster a business grows, the more willing investors are to purchase its stock, and the more they are willing to pay for it. If the supply of stock remains the same while the demand for it increases , the stock price will go up.
Why do companies go up in stock market?
Corporate executives often have a vested interest in making company stock go up, either because it increases the value of their stock options or because their compensation is tied to the stock price. Because it is easier to make the stock price go up than to increase company profits, top executives sometimes spare no effort to push up the stock price. One way is to buy back company shares in the open market: When the number of shares decreases, the business value per share increases, making the stock more valuable. Another way is to boost sales by buying a fast-growing business with company stock – a virtual currency that executives can literally create out of thin air by issuing additional stock to pay for the acquisition.
What are the factors that affect the value of a stock?
1. Three Factors That Affect the Market Value of a Stock. 2. What Makes a Stock Split? 3. Factors Affecting the Direction of Stock Prices. A stock’s price is what investors are willing to pay for it. Investors commonly buy a stock when they believe its price is going higher, hoping to sell it at a profit later.
What is a share of stock?
A share of stock represents a proportionate ownership in a business. Businesses are valued on the amount of money they make. If a business goes from making $100,000 annually to $1 million while the share count remains the same, its stock could be worth 10 times more.
What are some examples of business value?
For example: The value of a restaurant chain can be based on how much money it is making now, and on how much more it can be expected to make in the future by opening new restaurants. Another example: When the chances increase that an unprofitable biotech company will get ...
Who is Slav Fedorov?
He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.
Why do stocks move up?
Often a stock simply moves according to a short-term trend. On the one hand, a stock that is moving up can gather momentum, as "success breeds success" and popularity buoys the stock higher. On the other hand, a stock sometimes behaves the opposite way in a trend and does what is called reverting to the mean. Unfortunately, because trends cut both ways and are more obvious in hindsight, knowing that stocks are "trendy" does not help us predict the future.
What drives stock prices?
Stock prices are driven by a variety of factors, but ultimately the price at any given moment is due to the supply and demand at that point in time in the market. Fundamental factors drive stock prices based on a company's earnings and profitability from producing and selling goods and services. Technical factors relate to a stock's price history ...
Who is David Harper?
Forces That Move Stock Prices. David Harper is the CEO and founder of Bionic Turtle. He is also a published author with a popular YouTube channel on expert finance topics. Thomas Brock is a well-rounded financial professional, with over 20 years of experience in investments, corporate finance, and accounting. ...
What is FFO in real estate?
Real estate investment trusts (REITs), for example, use a special measure of earnings power called funds from operations (FFO). Relatively mature companies are often measured by dividends per share, which represents what the shareholder actually receives.
Is inflation bad for stocks?
2 Deflation, on the other hand, is generally bad for stocks because it signifies a loss in pricing power for companies.
What is valuation multiple?
The valuation multiple expresses expectations about the future. As we already explained, it is fundamentally based on the discounted present value of the future earnings stream. Therefore, the two key factors here are:
What is discount rate?
The discount rate, which is used to calculate the present value of the future stream of earnings. A higher growth rate will earn the stock a higher multiple, but a higher discount rate will earn a lower multiple. What determines the discount rate? First, it is a function of perceived risk.
What are the factors that affect the price of a stock?
A share is an ownership in the company. Hence, any positive or negative company-related factors can impact the price of its stock. Here are some such factors: 1 Any news or announcement regarding the present profits and earnings or predicted future earnings 2 If the company declares dividends, it impacts the price of its shares 3 Launch of a new product or the recall of a product 4 A tie-up, merger, or takeover 5 A significant change in the management of the company 6 Any scams or scandals involving the company 7 Layoffs or a major hiring spree
How does an earthquake affect the economy?
If there is an earthquake, then the country’s ability to produce and distribute goods can get affected. Also, it can cause physical damage to the infrastructure that would need time and money for repairs. Hence, such an event can impact the economy and in turn the stock markets.
What is bull phase?
A simple definition of these phases is as follows: Bull phase – This is a market trend where investors are optimistic about the future of the market and their confidence in the economy is rising.
What is the term for inflation?
Inflation is a term that we use regularly without realizing its impact on everything around us. This includes stock prices. CPI or the Consumer Price Index measures retail inflation. It collects information about the changes in the price of the most common goods and services and computes the average cost of living in the economy.
What does GDP mean?
In layman terms, GDP is an indicator of the health of an economy. Usually, a strong GDP growth means businesses experience better earnings and indicates a positive economic outlook. Hence, investor confidence is high and stock markets surge.
What is a positive announcement?
Layoffs or a major hiring spree. A positive announcement tends to boost investor sentiment leading to an increase in demand and thereby, the price.
What is the opposite of a bull?
Bear phase – The opposite of a bull phase. In a bear phase, investors are worried about the future of the market and are uncertain about the direction in which the economy is heading. A good example is the current pandemic crisis where people are not sure when the economy will revive.
Why does a stock move up?
A stock moves up or down in price because of investor sentiment. If investors believe a stock is worth more than its current price, it moves up. If they believe it's worth less, it moves down.
Is the stock market cyclical?
The Stock Market Is Cyclical. One of the most important things for any investor to know is that the stock market is profoundly and relentlessly cyclical. Relatively independent of the circumstances of the nearly 20,000 individual companies traded on U.S. exchanges and over-the-counter, the entire stock market swings from a bull market ...
What is corporatization?
Corporations are persons to a certain extent, apart from the personhood of the individual owners. One’s equity in a company becomes measured by the percentage of shares one owns or controls of this legal entity. Table Of Contents. Going Public. What the Company Gets for Their Stock.
Who owns Microsoft?
Bill Gates for instance is famous for both being a founder of Microsoft, although these days he only owns a couple of percent of the company, having sold almost all of it off. Steve Ballmer is actually the company’s biggest shareholder these days.
Can a company be public?
There are also some regulatory issues involved in a public offering, where if one’s company is private much more of the business can be kept private as well. To be approved to have one’s stock sold on exchanges though, regulators require much more transparency, and the company has to open up its books more.
Do private companies change hands?
Sometimes a company will offer a certain number of shares in exchange for private investment, but shares of private companies do not generally change hands very much at all. Most of the time, these shares do not represent a source of fund raising, for instance a company issuing more shares to the market to raise funds, ...
Fundamental Factors
Technical Factors
- Things would be easier if only fundamental factors set stock prices. Technical factors are the mix of external conditions that alter the supply of and demand for a company's stock. Some of these indirectly affect fundamentals. For example, economic growthindirectly contributes to earnings growth. Technical factors include the following.
News
- While it is hard to quantify the impact of news or unexpected developments inside a company, industry, or the global economy, you can't argue that it does influence investor sentiment. The political situation, negotiations between countries or companies, product breakthroughs, mergers and acquisitions, and other unforeseen events can impact stocks and the stock market. Since s…
Market Sentiment
- Market sentiment refers to the psychology of market participants, individually and collectively. This is perhaps the most vexing category. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a stock's future growth prospects, and the future may even confirm your projections, but in the meantime, the market may myopica…
The Bottom Line
- Different types of investors depend on different factors. Short-term investors and traders tend to incorporate and may even prioritize technical factors. Long-term investors prioritize fundamentals and recognize that technical factors play an important role. Investors who believe strongly in fundamentals can reconcile themselves to technical forces with the following popular argument…