Factors That Effect Change In A Stock’s Price

InvestingAs with most things in life, timing is everything.

Thinking about dabbling in the stock market? Wondering when is the best time to invest in a company. Buy now or wait? Own some stock and want to know why it has gone up or down in value. What are the internal or external influences? The list below summarizes some of the top reasons why a company’s stock price goes up or down.

Before getting to the list, understand this first fundamental rule that many individuals forget: The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding.   Stock price does not equate to value.  For example, Company “X” trades for $100/share and has 10mm shares outstanding has a lesser value than Company “Y” that trades for $50/share and has 50mm shares outstanding. Before you buy, research the company you are thinking about investing.  There is a wealth of information available on many financial investment websites.

Keep in mind that stock prices are volatile and can change in price extremely rapidly. Now to factors that effect a stock price to change:
  • Announcement of dividends Always great if it is the same amount as in the past.  If lower, why?
  • Introduction of a new product or a product recall –  Is it a minor or major recall?  Can it easily be fixed?  Will this affect the company’s reputation?
  • Securing a new large contract – This may look good on the surface, but what other issues can arise such as strain on cash reserve, hiring new employees, secure a new location, etc.
  • Employee layoffs – permanent or seasonal employees?  What caused the reduction?
  • Anticipated takeover or merger – Stay informed and get news feeds, Twitter, and other updates
  • A change of management – Who left and why?
  • Supply and demand – If more people want to buy a stock (demand) than sell it (supply), then the price moves up.
  • Earnings – Profits the company makes. Public companies report earnings 4 times a year. Stock market analysts base company’s future value on their earnings projection.
  • Investors’ sentiments, attitudes and expectations that ultimately affect stock prices.
  • Economic Strength of Market and Peers – Company stocks tend to track with the market and with their sector or industry peers. A suddenly negative outlook for one retail stock often hurts other retail stocks as “guilt by association” drags down demand for the whole sector.
  • Accounting errors or scandals

And for the final factor: Nobody really knows for sure. Some believe that it isn’t possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell.