Gains not losses: Key factors that affect share prices in the market
Gains not losses: Key factors that affect share prices in the market
Share price fluctuations can either create opportunities for gains for investors – or potentially be the cause of losses.
What can cause such movement in share prices? Supply and demand in the market are fundamental economic indicators of change in the pricing of products, and the same is true for stocks.
Factors that drive demand (buying orders) higher than supply (selling orders) will generally lead to an increase in stock price. Conversely, any that drive supply higher than demand will lead to a decrease.
These can be divided into three major areas – internal factors, external factors and market sentiment.
Internal factors
Internal factors refer to those related to a company’s business operations that can influence its share price on the market. These include:
Financial statements
Normally, the stock price of a company will change on the disclosure of the quarterly, semester and yearly financial statements that show its business outcomes.
Investors will have greater confidence in a firm’s stocks if the reports illustrate profit growth, efficient expenses management and sales potential.
Shares in a company will as a consequence become more attractive, and investors will be willing to pay higher prices to purchase them.
Dividend policy
Dividend policies and decisions on dividend pay-out ratios have a strong impact on market price.
A company with a high and regular dividend pay-out policy is highly attractive, especially for short-term investors.
Generally, as the dividend distribution day draws closer, the stock price will see a large boost.
This is as a result of demand from buyers as shareholders are entitled to the pay-out regardless of the length of time they have owned stock.
On the other hand, if a company decides to change its dividend policy by not distributing out within five years, instead keeping it as investment capital to enlarge its business operations, the stock price is likely to take a fall.
Less patient investors will sell their holding stocks and start searching for other stocks with a regular dividend payment.
Other company information
Fluctuations in stock price also occur in the case of a transformation within a company likely to affect the business forecast. These may include the take up of state-of-the-art technology or of hot new products that bring an advantage over the competition.
Others include a change in a company’s management, whether a firm wins or loses bids for projects to sustain its revenues or a legal prosecution, among others.
For example, Apple’s stock price surged dramatically after the company announced a new project to roll out electric cars in 2024.
As per the regulations, the aforementioned financial statements and other stock information issued by a company must be publicly disclosed through the Cambodia Securities Exchange (CSX).
Investors can therefore easily find such information on the CSX’s Corporate Disclosure.
External factors
Economics and politics
Economic uncertainty and political turmoil can cause stock markets to plummet. In such cases, listed companies would start to show signs of turbulence, leading to profit loss and possible bankruptcy.
As investors lose confidence, they may start selling large amounts of shares at lower prices. Conversely, share prices rise with stability and economic growth.
Interest rates
There is a close correlation between interest rates and share prices. An increase in interest rates causes share prices to drop, with the opposite also true.
Higher interest rates mean the borrowing principal becomes more expensive, with the profit of a company reduced.
This weakens investor interest in its stock investment as a low return rate is to be expected, with sell-offs at lower prices as a result.
Tax policies
Amendments to taxation policy – such as those regarding tax incentives and the rate of tax and duty, among others – can affect the cost of products and services, leading to a decrease in a company’s profits and revenues.
This can cause changes in stock prices as per the perceptions and expectations of investors regarding that company’s performance.
Disasters
It is not impossible for a company to be hit by the effects of an unexpected natural or manmade disaster, such as an outbreak of disease, flooding or earthquakes, or social instability or rioting.
This can affect a company’s operations and lead to the loss of income or other assets.
Such events may threaten a company’s financial stability and lower investor confidence, with sell-offs to be expected as a result.
However, not every company will be affected in the same way.
For example, the operations of some social media companies haven’t been upset during the Covid-19 pandemic as others have due to an increase in the numbers of users leading to a surge in profit rate. This drives the stock price to rise.
Substitution
Substitution refers to the replacement of less liquid or less growing stocks with other types of securities, such as real estate investment trusts (REITs).
The rise of various stocks and other securities products provides investors with greater choice to flexibly allocate their investment portfolio to match their investment goals.
Hence, the transformation of investment goals will urge investors to purchase and sell other stocks, leading to a fluctuation in stock price.
Incidental transactions
An incidental transaction is a type of trade made based on assumptions rather than a stock’s intrinsic value.
Such assumptions include rumours and insider information not publicly disclosed. These can cause extensive sales and acquisitions, causing rapid price fluctuations.
Market sentiment
Market sentiment – also known as investor sentiment – indicates the overall feeling of investors towards the market.
This means investors make decisions guided by their emotions or the bandwagon effect rather than by using fundamental and technical analysis, which may take longer to understand.
For example, when a stock is on a rising trend, people may follow one another and start purchasing freely without considering whether or not the stocks have reached their peak price.
And this will drive the market price of the stocks to be higher than their intrinsic value.
Another example is when investors attempt to sell their holding stocks and then buy the shares of a new listed company.
This can cause the price of the new shares to increase while decreasing the price of the previous holding stocks, although their performance remains strong.
Market sentiment is considered the hardest factor to control and analyse as it lacks any specific fundamental analysis – however, investors shouldn’t overlook this as it has been shown to have great impact on stock market prices.
