Share prices can be extremely volatile in a day or even for briefer periods lasting a couple of hours. Alternatively, shares may remain stable for days or weeks before a discernible trend emerges. It is this uncertainty and unpredictability of share price movements that makes investing such a fascinating exercise.
What moves share prices? A host of factors- some internal to a company and some external. Broadly, the fundamental strengths and weaknesses of a share and its technical charts govern its price variations. In reality, though, there are many variables which can affect investor sentiment and hence share prices.
We will attempt to analyze factors influencing share prices in stock markets.
Share prices do reflect the company’s fundamentals as a rule. This means a company generating healthy revenues and profits year after year will appreciate over a period. This explains why value and growth investors hold on to such shares as they are not concerned with short-term price aberrations.
Investors instinctively determine whether a share is overbought or oversold at a given point in time. Understanding the available charts visualizes a particular stock has breached its short term/medium term/long term resistance and support levels. For the benefit of the laymen, a breach of major support is a bearish signal and a break above the resistance level a bullish signal. There are several parameters based on which an investor takes an investment call, and this at the macro level becomes an essential factor influencing sentiment and share prices.
REGULATORY AND GOVERNMENT POLICY
Government policies are unpredictable and can change at short notice. To tackle shortages in essential commodities, a government may resort to imports to cool commodity prices in the domestic market. This affects the profitability of local companies and has a direct bearing on their share prices at least in the short term.
A bonus or a rights issue at a steep discount to current market price is likely to influence the company’s share price in the near term. Similarly, a merger announcement can send a company’s share price soaring if it is perceived to be adding value to its business.
In today’s environment, the fortunes of companies are highly dependent on external factors. The recent crisis in the financial markets is fresh in everyone’s memory. The recession that gripped the US economy in early 2008 took its toll on industries and companies across the globe. Exports to the US were walloped as inventories started piling up and retail sales in the US slowed down as consumer spending went into a tailspin. A sector badly affected was textiles as sales realizations fell steadily.
Other equally important factors to watch for its influence on share prices are interest rates, currency fluctuations, the extent of leveraged positions in the derivatives markets, foreign portfolio investment inflows and outflows.
With so many variables at play, some of which are unknown and unpredictable, it is never easy to predict which way a share will move in the short term. It is relatively easier to visualize the fair price of company stock based on its projected earnings multiple and its revenue guidance issued by analysts. This is all the more reason to be cautious while investing both for the short term and long term. Investment in equity calls for regular monitoring of stock in your portfolio to separate the non-performers from the steady performers.