What Are the Main Factors Impacting the
Demand and Supply of
Stocks?
What Are the Main Factors Impacting
the
Demand and Supply of Stocks?
A company’s stock price or
share price represents the worth of the company in the minds of investors. All investors aim to buy
shares at low
prices and sell at higher prices to book a profit. Varied perceptions and expectations
come together to determine a company’s share price, or
a price at which investors wanting exposure
are willing to buy and investors wishing to offload their holding are willing to sell.
A company’s stock price or
share price represents the worth of the company in the minds of investors. All investors aim to buy
shares at low
prices and sell at higher prices to book a profit. Varied perceptions and expectations
come together to determine a company’s share price, or
a price at which investors wanting exposure
are willing to buy and investors wishing to offload their holding are willing to sell.
The factors affecting the share price of a
company are:
The factors affecting the share price of a
company are:
Fundamental
Factors
-
Size of company and its history of outperformance
-
Market capitalization
-
The present and projected earnings of the company
-
The track record of the management team and any changes
in top executives
-
New growth initiatives planned by the company (like
entering new markets, launching new products or services, addressing a new segment of
the population, etc.)
-
The marketplace in which the company operates (including
the level of competition, how differentiated the company’s offerings are versus its
competitors, how price sensitive the customers are, etc.)
-
Growth in the industry or segment to which the company
belongs
-
The political landscape in the geographies in which the
company operates (whether there is political stability, whether the ruling political
party supports the industry to which the company belongs)
-
The regulatory environment
-
Share buybacks
-
Dividends offered
-
Insider transactions
-
Actions of a large investor or institution
-
M&As (mergers and acquisitions planned by the company)
-
Risks related to the company
Technical
Factors
-
Technical analysis – This is based on the past
performance of the company’s stock. It uses historical price trends to make projections
of future share prices.
-
Inflation - This has a strong inverse correlation with
valuations, meaning the lower the inflation rate, the higher are the multiples. Of
course, deflation is an adverse backdrop for any company and negatively impacts share
prices.
-
Availability of substitutes – Stocks compete for a place
in an investor’s portfolio. Therefore, the demand for stocks is a function of the
availability of other options, like government bonds, corporate bonds, foreign equities,
forex, commodities, metals, and real estate.
-
Investor demographics – Studies have shown that
middle-aged investors favour the stock market. This is because these investors are at a
stable stage in their careers and have greater risk appetite. Older investors, who tend
to include more stable asset classes, have a low demand for stocks.
-
Liquidity – This refers to the investor interest in the
stock of a company. Shares of larger companies tend to have much higher liquidity than
smaller, lesser known firms.
-
Economic releases – Economic data announced by the
government or leading agencies indicate the health of the economy. Since a company’s
performance is dependent on the economic growth of the region in which it operates, such
releases impact the share price.
Market
Sentiment
This refers to the overall market mood as well as the mood towards
the particular stock. Sometimes, a company’s share price will rise without any obvious
improvement in the company’s performance or any news that benefits it. The upturn may be
driven by overall bullishness among market participants. For instance, during the pandemic,
certain tech giants reported substantial profit growth. The overall euphoria sent the shares
higher of even those tech companies that had not announced a significant rise in profits. At
times, the bullish or bearish sentiment in the US stock market impacts the mood for Asian
and European stocks.
Some experts consider investor sentiment has the herd psychology (or
the tendency to follow others in determining how to trade a stock), while others define it
as the tendency of the market to adopt a myopic view and dwell on a single event or news.