The stock market is a volatile and unpredictable place, and not all of its price movements can be explained. However, if you were to analyse the stock market a little deeper, you can observe a few factors that play a part in determining price movements. Understanding these factors can help you take more calculated risks when you trade in the stock market.
Supply and demand
One of the main factors that influence stock prices is supply and demand. When the supply and demand do not balance each other out, the price of stocks fluctuates. The general rule is that when demand is higher than supply, the prices rise, and if supply is higher than demand, the prices drop.
For instance, when there is more demand for Apple stock but not enough stock to meet this demand, the price goes up, and if there are many Apple stocks available on the market but not a lot of demand for them, the prices fall.
Market sentiment
The prices of stocks also depend on the human factor, particularly human psychology. People are guided by their emotions, which can also be true when trading.
Traders can be influenced by rumours swirling around the stock market. If there are talks about a certain company making lesser profit than expected, traders, afraid to lose their earnings, may steer clear of the company, or could sell off their stocks. Similarly, if there is news about the company expecting massive profits, the surge of confidence could influence traders to buy more stocks in hopes that the stock prices would continue going up in the future.
Another example of how market sentiment affects stock prices is when there are major geopolitical issues happening. Traders often keep up with current affairs, and when there is a situation, such as a boycott of a certain company and its products, they could anticipate a dip in profits. Thus, shareholders in the company may be inclined to sell some or all of their holdings, which could, in turn, cause the stock price to decline.
Fundamentals of the company
In addition to supply and demand, and market sentiment, a company's fundamentals are also essential in determining its stock prices. A companys performance shapes what traders think would happen in the future, and their expectations and analysis of the changes that happen to the company affect stock prices.
For instance, if there is an internal shift in a certain company, like a change in the board of directors, traders could look into the previous performance of the new board of directors, and analyse whether the new management can bring more success to the company. If they expect the company to suffer losses under the new management, they may avoid trading stocks of that company. They might even sell their stocks at a slightly lower price to avoid big losses in the future. If the majority of traders feel the same way, following the supply and demand principle, the price of the companys stocks could fall because of surplus supply.
When a change happens in a company, such as rebranding, traders might think it would profit the company in the foreseeable future. Because of that, they could buy more stocks of this company with the expectation that the price will continue to rise, increasing their earnings.
Some traders may have a more accurate prediction of the stock market by relying on research analysts and making their observations based on stock market reports. You can read more on fundamental analysis and keep up with our weekly market reports to help you make more calculated risks.
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