Stock prices are decided in the marketplace, where buyers and sellers meet by meeting their demand and supply chain. Also, stock prices fluctuate often, increasing or decreasing their values daily. If you are a newbie investor, you might be confused about why stock prices fluctuate every trading day. You might even be wondering about the factors that cause these fluctuations. You don’t have to worry because you are not alone. In this article, we will highlight five factors influencing stock prices, thereby leading to price fluctuations. Let’s get into it.
Although quantifying news impacts, a company’s unexpected developments, or the economy are complex; they certainly influence sentiments in investors. Product breakthroughs, political situations, mergers, negotiations between companies or countries, acquisitions, and other unexpected events can significantly affect stocks and their market. News in a country can affect investors in another country almost immediately since securities trading occurs worldwide. This also happens because economies and markets are interconnected. The news of a particular organization, such as releasing its earnings report, can also affect the price of a stock, especially if the statement is coming after a bad quarter.
Generally, strong earnings will impact the stock’s price positively and vice versa. However, some organizations have a rocketing stock price despite not making much money. This is usually because the price represents the investors’ predictions and expectations that the organization will be profitable in the long run. It’s notable to mention that it doesn’t matter the stock price; there are no assurances that investors’ predictions about a stock price will be achieved.
Supply and Demand
Another reason why market prices fluctuate is because of demand and supply. This is because the stock market primarily serves as an auction. So, when there are more buyers than sellers in the market, the stock price must change and adapt, or else no trades will be executed. In a situation like this, the stock price usually goes up. Thereby enticing and prompting the investors to sell their shares even when they don’t plan to and also increasing the market quotation investors can use to sell their shares. On the other hand, when the sellers are more than the buyers and the demand is low, the seller that takes the lowest bid automatically sets the price, causing the stock price to crash.
Liquidity is a crucial factor that makes market prices fluctuate. However, it’s usually underappreciated. Liquidity describes how much interest a stock price attracts from an investor. For example, Walmart’s stock is incredibly liquid, which significantly responds to material news. On the other hand, the average organization with a small cap does not. An organization’s trading volume is more than a proxy for liquidity. It is also a role of corporate communications, which is the extent to which investors pay attention to the organization.
Generally, organizations with large caps are susceptible to liquidity since they are heavily transacted and closely followed by investors. Numerous stocks with small caps experience an almost persistent “liquidity discount” because investors are not heavily transacting them.
Market sentiment is described as market individuals’ psychology, independently and collectively. Market sentiment is frequently biased, subjective, and stubborn. For instance, you can predict a stock’s growth prospects, and even several other indications might also agree that you are correct. However, in the meantime, the stock dwells on news that keeps it artificially high or low. This will make you wait an extended period while hoping other investors will identify the same fundamentals you did to reach your conclusion.
Currently, market sentiment is being investigated by behavioral finance, a relatively new field. It begins with assuming markets are seemingly not efficient all of the time. Psychology and other social science disciplines describe this inefficiency adequately. Behavioral finance’s numerous ideas confirm suspicions; numerous investors react with more significant pain to losses than to wins of similar profits; investors usually overemphasize every data that comes to their mind; when an investor makes a mistake, they persist in it. While some investors state that they can capitalize on behavioral finance’s theory, the field is recent enough to function as a “catch-all” type for the majority.
Incidental transactions are sales or purchases of a stock driven by other factors other than belief in the stock’s intrinsic value. These transactions include official insider transactions, often motivated by portfolio goals or pre-scheduled. Another example that succinctly explains incidental transactions is an institution shorting or buying a particular stock to hedge another investment. While incidental transactions do not represent official voting for or against a stock, they significantly affect its demand and supply. This will, in turn, move the price upward or downward.
Several factors influence a stock price. And this article has highlighted five of them such as news, market sentiment, liquidity, etc. However, it would help if you did not forget that various investors depend on different factors. You must recognize the factors that affect your trading and use them to your advantage.